Our 2023 outlook for Italian sovereign bonds

The rise in interest rates has brought back into focus discussions about debt sustainability in highly-indebted countries, like Italy.

Italy’s debt-to-GDP ratio has fallen in 2021 and 2022 despite massive public spending to counter the impact of the pandemic and the war in Ukraine. This might seem counterintuitive, but higher nominal GDP growth (thanks to high inflation) has played a big role in improving the debt picture. 

After some widening around the snap elections, the 10-year Italian sovereign spread against the Bund fell again below 200 bps, to 186 bps (on 16 February), sustained both by the relative fiscal rectitude of the new right-wing government and by the dissipation of the energy price crunch. 

Considering the improving outlook for Italy, we expect the 10-year spread to hover below 200bps in H1, before increasing slightly towards 220bps by yearend. Our expected spread widening later this year is primarily related to our concerns over an elevated policy rate and new price-sensitive buyers as the European Central Bank reduces its footprint. This could translate into higher Italian sovereign bond yields and could again spark concerns with regards to debt sustainability, so we remain underweight on euro periphery government bonds overall.