BTp Bund spread at 177 points on the day of the Moody’s rating

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Nobody expected anything. The word “downgrading” of the rating never circulated among investors yesterday. Nobody believed yesterday that Moody’s could cut the rating currently “Baa3” with a “negative outlook” and bring Italy into the purgatory of junk bonds. This is why on the eve of Moody’s decision, which arrived when it was past 10pm in Italy and the markets had been closed for hours, the spread between BTp and Bund actually fell even though it returned to its starting point in the evening: compared to 176 basis points on Thursday evening, yesterday it reached 173, the lowest since September, and then closed at 177. But the real point, regardless of the fluctuations, is that yesterday the rating was not a topic on the markets: the spread between BTp and Bund fell, amid falling yields everywhere, thanks to Thursday’s sharp drop in oil prices. And it went back up when oil recovered.

The fall in rates

To understand the reason for the positive day for BTps, we must therefore start from the markets. The price of oil fell more than 5% on Thursday evening. In the eyes of investors, this was the proverbial icing on the cake at the end of a week that had already sent a loud and clear message: inflation is falling faster than expected everywhere. The cost of living fell more than expected in the United States in October, going from 3.7% to 3.2% (while expectations were for 3.3%). But it has also fallen in Great Britain and various European countries.

This has convinced the markets that the US Fed and the ECB will no longer raise rates. Indeed, investors now expect four cuts in both America and Europe between June and December 2024. Thus, seeing the price of oil collapse on Thursday supported the idea that inflation is destined to fall further. This pushed yields in America and Europe to their lowest since September. Only in the evening, with oil rebounding sharply, did yields return to their starting point.

The wait for Moody’s

Yesterday the BTp also enjoyed waiting for Moody’s judgement. The reason why the market was convinced since the afternoon that the agency would not cut the rating is very simple: in the last “credit opinion”, which dates back to May, Moody’s clearly wrote which events would cause a downgrading of Italy . And to date they haven’t really occurred. In fact, Moody’s indicated, as reasons for cutting the rating, “a significant weakening of the economy and financial strength”, a lower commitment on the part of the Government “to implement the PNRR”, the “return of an energy crisis” and “signs of a significant increase in debt dynamics”. Still critical issues for Italy, of course, but not verified.

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