The best BTPs to buy in 2024

European Central Bank President Christine Lagarde said keeping the deposit rate at 4% should be enough to tame inflation, but board members would consider raising rates again if necessary.
Yet a few weeks have passed since the meeting in which the members of the ECB's governing council abstained from a further increase, for the first time in their hike cycle that began last year.
Lagarde then signaled at an event organized by the Financial Times that the ECB is gaining confidence that current monetary policy is achieving concrete results in the fight against inflation, declaring that "the level we are at at the moment, if we sustain it long enough long term, will make a significant contribution to bringing inflation back to our 2% target.” How long this period of maintenance of the current rates is, stuck at the 4% (deposit rate) and 4.50% (1 week loan rate) corridor, can be deduced from the expectations of the derivatives market, precisely from the futures on the overnight rate , whose prices vary downwards at the various maturities in the coming months.
Below Bloomberg gives us a table of the levels expected by investors on the overnight (1-day rate) in 2024.
(The ON is the 1-day rate of loans between banks linked perfectly to the official ECB rates).
The ECB president spoke in the wake of euro area data showing that overall inflation slowed to 2.9% in October, the weakest pace in two years.
However, there is a risk to price stability: the prospect of a broader conflict in the Middle East (Iran's involvement) which could fuel oil prices upwards.
And that's a threat to the near-term inflation outlook that ECB officials are watching closely.
Personally, however, I think that Iran's involvement in the Hamas-Israel conflict is an unrealizable hypothesis: if it had wanted, Iran would have already entered the war alongside Hamas, which it did not do.
And if it has not done so until now, it is unlikely that it will do so in the future, and Israel knows this.
And in fact Israel refrains from launching missiles towards Tehran or attacking the Shiite nation in any way, because an expansion of the conflict is not even in its interest.
In short, the ECB does not want to appear formally optimistic, but always wants to give the markets a prudent vision in the fight against inflation – it is also a strategy common to other central banks.
All central bankers continue to underline that rates will remain high for a while: even the Federal Reserve minutes signaled more or less the same message as the ECB.
But the markets, as already observed in the tables of derivatives on future interbank rates, do not pay attention to it.
There is a feeling that central bankers are trying to manipulate the inflationary expectations of bond market participants, but investors "are not fooled" and are increasingly looking at the disinflationary details of consumer prices in advanced economies and are increasingly speculating on rate cuts that will have to come.
Even in the USA, the slowdown in inflation and the signs that the labor market is in the process of "deflating" can only encourage traders on the overnight dollar to bet that the Fed has already finished raising interest rates and that will be ready to reverse monetary policy with new reductions in the reference rate in the first half of 2024.
Bloomberg comes to our aid in this case too with the table of future prices of the overnight rate in dollars, estimated by the US derivatives market.
Traders' overnight forecasts estimate an interbank overnight level of 4.25% in January 2025, down 100 bps from the current level of 5.25%.
Not only is the overnight rate market signaling a future decline in official rates, but the bond market is also betting on the arrival of recession around the world.
Just look at the Bloomberg table of the global bond benchmark below, which highlights how the 10-year yield on the US Treasury, after the peak of 5% in October 2023, fell to 4.40% as of November 24 and is – in my opinion – destined to return to the 4% threshold (white horizontal straight line), and perhaps even below 4%, already by the end of the year or in the first months of 2024 – as I had already written in my article of 4 September 2023 “Why will the US 10-year yield fall below 4% by the end of 2023?” How can we make money from this decidedly bearish interest rate outlook for 2024? Simple.
Sell inflation-linked securities if you have them in your portfolio.
Sell floating rate bonds.
Since both of these asset classes in the bond market are destined to depreciate in the next year.
Buy fixed rate securities instead.
And in the long term, if you can bear the risk and fluctuations typical of ten- or thirty-year bonds.
In the euro area, my favorites are Italian BTPs.
Why? Simple: the Italian public debt, after having passed the scrutiny of the rating agencies unscathed (which I also did not fear at all, as I explained in the analysis "BTP, buy or sell today? Waiting for the rating agencies", i.e.
the BTP Italian represents the most tempting opportunity among public debt securities in the euro area.
In fact, I believe that long-term BTPs are the securities that will appreciate the most with the collapse of inflation in the euro area, more than French OATs or German Bunds.
As is already happening.
Here is an example.
In the Bloomberg table below, the German thirty-year bond appreciated from 25 October to 22 November by +7.5% on the bond rally of recent weeks.
While instead, again thanks to the Bloomberg table below, the Italian thirty-year BTP 4.50% expiring in October 2053 has appreciated by +9.3% in the same period.
Add to this the fact that the "help" given to us by the rating agencies has not yet manifested its its beneficial effects and should further narrow the BTP-BUND spread in the coming months, during the declining phase of inflation in the euro area.
As you can see below in the Bloomberg table of the trend of the 10-year yield spread between Italy and Germany in recent months.
A further reduction in the spread in the 155-160 bps area, as happened in June 2023, if it occurs at the same time as the drop in global rates, further strengthens the upward potential of long-term BTP prices between now and spring 2024.
In conclusion: if you can tolerate the risk of long-term bonds and if you have confidence in Italian political stability over the next 12-24 months (in fact, I don't see early elections on the horizon in Italy for the next 2 years) you cannot help but consider purchasing the following securities : BTP 4.50% OCTOBER 2053 (ISIN IT0005534141) BTP 5% SEPTEMBER 2040 (ISIN IT0004532559) BTP 4.75% SEPTEMBER 2044 (ISIN IT0004923998) These above are 3 formidable opportunities to obtain high coupons, i.e.
a good annual income for those who want to enjoy a supplement to their pension or salary, and a good prospect of revaluation (of 10% or more capital gain for the next 12 months) for traders who like to ride the 2024 bond rally.