The spread between German and Italian 10-year yields has long been a gauge of the market's confidence in the financial stability of Italy specifically, and of the euro area periphery more broadly.
There were fears this spread would widen materially following the election of Prime Minister Giorgia Meloni in September, but in fact the spread has fallen substantially since then and remained rangebound so far this year.
It's a puzzling outcome, says Wellington Management's Marco Giordano, given that Italy's cash deficit has worsened and budget projections point to a further deterioration of public finances.
"One explanation for spreads staying pinned is huge flows into Italian government bonds (BTPs) from Italian savers," he says. "Approximately €70bn has been invested by households in Italian government bonds over the last six months, taking up nearly all net new issuance.
"As the ECB steps out of the market, the Italian saver seemingly steps in. This could potentially have an impact on bank deposits and, ultimately, could hinder the ECB's efforts to tighten."
This post is funded by Wellington Management
