LONDON, Jan 27 (Reuters) - The closely-watched spread between Italy’s 10-year government bond yields and those of Germany could tighten to 120 basis points, levels last seen in mid-2018, Goldman Sachs said on Monday.
Italian bond yields have tumbled after the right-wing League failed to overturn decades of leftist rule in the northern region of Emilia-Romagna in Sunday’s election. That’s pushed the Italian/German yield spread, a measure of the premium investors demand to hold Italian risk, to around 140 bps .
Goldman said the rally in Italian bonds following Sunday’s regional election results reflected a view that a near-term snap national election was unlikely.
“Despite the rally so far today, we think BTPs (Italian bonds) have more room to outperform versus other Euro area sovereigns,” the bank told clients in a note.
“Macro and political risks will remain a potential source of volatility in Italian debt over the longer run, but tactically we expect further compression in BTP-Bunds to 120 bps, assisted by the improving macro data in Europe.”
The 120 bps milestone was last seen in May 2018, just before an Italian political crisis sparked a sharp bond selloff.
Reporting by Dhara Ranasinghe; editing by Sujata Rao