Warning: BTP Yields Set to Plunge by 2025 – Here’s Why

The Current State of Italy’s Public Debt

Italy’s public debt is set to remain high, but a significant boost for state finances will come from the decrease in BTP yields and the BTP-Bund spread.
This trend is expected to continue into next year, according to a growing number of analysts and investors monitoring Italy.
The BTP-Bund spread has dropped to levels not seen since the Draghi government.

However, Italy is far from celebrating, as warnings about public debt persist from various quarters, including former Prime Minister Mario Monti.
He pointed out that the difference between the yields of BTPs and 10-year Bunds remains a major concern in the Eurozone.

Positive Outlook Amid Concerns

Despite the concerns, there is room for the spread to decrease further, thanks to a specific factor aiding Prime Minister Giorgia Meloni’s government: the European Central Bank (ECB) under Christine Lagarde.
The monetary policy shift initiated by Lagarde is already assisting Italy’s public finances.

Thus, favorable outlooks for Italian bonds are surfacing at a time when Treasury auctions for additional resources are historic.
According to the Confindustria Study Center (CSC), forecasts indicate a significant drop in BTP yields and spread levels, projecting an average BTP yield of 3.70% in 2024 and 2.38% in 2025.

Expenditure Expectations and Growth Projections

Based on government expectations in the Stability Program, interest expenses could decrease by approximately €800 million due to a gradual decline in the spread to 100 basis points by the end of 2025.
This adjustment is outlined in the public finance section of the report “The Knots of Competitiveness” released on October 22, 2024.

The forecast for Italy’s GDP growth has been revised downward to +0.8% for 2024 and slightly higher at +0.9% for 2025.
Nonetheless, the public debt continues to be a critical problem, expected to rise to 136.9% in 2024 and 138.5% in 2025.

Interest Rate Effects and Future Implications

The CSC emphasizes the calming effect of lower Eurozone interest rates on public interest expenditures.
It predicts a moderate increase in interest spending to €85.6 billion in 2024 and €86.4 billion in 2025 due to a larger stock of state bonds issued post-COVID at higher rates against the backdrop of easing ECB monetary policy.

As such, while the previous monetary tightening aimed at curbing inflation spiked interest expenses in recent years, the anticipated decline in rates is likely to reduce the cost of servicing the debt over the next few years, marking a significant shift in financial outlook for Italy.

Given this scenario, the BTP-Bund spread and yields are expected to remain under pressure, creating a favorable environment for Italy’s fiscal balancing act.