Because BTPs don’t care about turbulence in the markets
Analysis of the good performance of BTPs despite the market fibrillations last week. Liturri's in-depth analysis
A week after the panic and the headlines in large letters in the newspapers due to the strong correction of the stock markets, it is good to take stock and highlight the performance of our BTP.
The summary is that after five days of great volatility on global financial markets around the world (stock and bond, albeit in different directions) the BTP remained firm like a sphinx, with the spread slightly rising but still below 150. A balance unthinkable until a few years ago. Especially in a scenario in which the ECB has been a net seller of our securities for a few months and the Treasury is forced to issue significant issues of public securities to cover a decreasing cash requirement, but which remains at historically high levels, above all due to the of Superbonus credits.
This is the photograph that the markets and the data published sequentially by the Mef and the ECB in recent days give us.
But let's rewind the tape and go back to Friday last week, when data arrived from the USA which showed a significant weakening of the labor market and supported a recessionary scenario, rather than that of a "soft landing" of the US economy. Making it probable that the Fed will cut rates by as much as 50 basis points in September.
The result was a sharp drop in the yields (rise in prices) of the ten-year US bond (from 3.94% at the opening to 3.79% at the closing) and of the German Bund (about 15 points less yield), notoriously considered a “safe haven” in risk-averse situations. Movements of truly significant size and speed for such liquid government securities.
In the same hours, the ten-year BTP remained stuck at around 3.65%, not benefiting from the so-called "fly to quality", but not even suffering a flight from investors who, in such situations, sell the riskiest securities in favor of "safe havens". ”.
Same script on Monday, which opened with the earthquake coming from the Japanese market. BTP stuck around 3.65%-3.70%. Although one of the favorite movements of investors – jeopardized by the moves of the Bank of Japan – had long been to borrow in yen at very low rates to buy high-yielding securities, including BTPs. The dismantling of those positions did not cause any disturbance to our ten-year anniversary. On Tuesday, Wednesday and yesterday – thanks to the data arrived in the afternoon on better than expected unemployment benefits in the USA – the movement of repositioning of the portfolios ended and the BTP spread returned to 145, when it was at 142 on Thursday evening before of the beginning of the chaos. US Bunds and T-Bonds also followed a similar trajectory.
But what reasonably determined these investor behaviors? Before answering, two other fundamental pieces must be added which make the positive performance of our public securities even more significant. The first is the trend in state cash requirements, published monthly by the Mef. This parameter essentially measures the imbalance between income and expenditure and the extent of recourse to the market, net of treasury availability. For some years it has been strongly influenced by the compensation of tax credits for construction bonuses. If taxpayers compensate, the Mef's coffers will be emptied. Suffice it to note that, in the first five months of 2024, the Mef communicated that these compensations grew by 12.6 billion compared to the same period in 2023. Never before have it been cash movements that count and are monitored by the Mef. The deficit (which reasons on an accrual basis) is in the background, in fact the Superbonus entered entirely into the deficit of previous years, but is transferred to the debt in subsequent periods, as compensations take place.
In the other direction, it is worth highlighting the significant increase in tax revenues, announced on Tuesday, which, although penalized by the different calendar of tax payments between 2024 and 2023, showed an increase of 4.1% in June (+10.1 billion). With the reasonable probability that when the collections for July and August are made known, with the IRPEF and IRES self-liquidations, the increase could be even higher.
The sum of all these factors generated a state sector cash requirement of 92.9 billion from January to July (slightly down from 95.3 in June). Significantly higher than the 79.1 recorded in the same period of 2023 and 2021.
Consequently, in the first half of 2024 net emissions amounted to 95.8 billion, a figure lower than that of the same period of 2023 but significantly higher than that of 2022 and 2019. With one important and fundamental difference: there is no it's more the ECB that buys those bonds. On the contrary, in the first half of the year – adding the two PEPP and PSPP programs – the net sales of Italian securities amounted to 23.3 billion. So the Mef had to place a net 119.1 (95.8 + 23.3) billion with other investors (families and foreigners first and foremost), who absorbed everything without asking for greater returns. This figure is significantly higher than what happened in the corresponding periods of previous years, when the ECB's net purchases had been approximately zero (2023) or had covered a significant share of net emissions (66% in 2022, 65% in 2021 and even 95% in 2020).
It's easy to manage the sales of titles when they collect almost all the goods on the stall from Frankfurt. But minister Giancarlo Giorgetti had to manage the exact opposite situation: to even sell the securities that the ECB returned to him. Only by keeping in mind the exceptional nature of this context can we understand the extraordinary performance of our government bonds, especially during a potentially adverse market situation.
Considering that the spread with the Bund is already an approximate measure of a risk premium that Italy pays to the investor, the solidity of the BTP is explained by the prevalence of a positive evaluation of the risk-return ratio of Italian securities. Taking into account, on the one hand, the prospects of sufficient growth and our solid position as a net exporter and net creditor abroad and, on the other, the contemporary political and economic difficulties of France and Germany. With the legislation in force, we are already in line with the path to reducing the deficit that will be required by the reformed Stability Pact, unlike France where the corrections will be real and therefore we are no longer in 2011, at the time of smiles between Angela Merkel and Nicolas Sarkozy at the G20 in Cannes. As of today, these are the facts.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-i-btp-se-ne-fregano-delle-turbolenze-nei-mercati/ on Sun, 11 Aug 2024 06:38:49 +0000.