The 30-year Bund yields are approaching their highest levels in 15 years, exhibiting bearish steepening in the market. Demand for recent syndications remains robust, particularly with the BTP orderbook reaching €157 billion.
Upcoming auctions are anticipated, with the market seemingly prepared despite ongoing bi-weekly SPGB and OAT auctions. Although scheduled auctions will have tenor extensions up to 23 years, a positive carry environment is noted.
Holding BTPs Due to Supportive Risk Sentiment
Holding BTPs is advised due to supportive risk sentiment in the market. The potential for enhanced rating actions follows S&P’s recent positive outlook on its BBB+ rating.
We are seeing 30-year German Bund yields push past 3.4%, testing levels not seen since before the 2011 sovereign debt crisis. This upward pressure on long-term rates is causing the yield curve to bear-steepen, a dynamic derivative traders should monitor closely. Traders could consider positioning for a wider spread between 2-year and 30-year yields, as markets price in persistent inflation expectations.
This move seems driven by the stubborn core inflation figures we saw across the Eurozone late last year in 2025, which have kept the European Central Bank from signaling any definitive policy easing. The market is now pricing in a higher-for-longer rate scenario, impacting long-duration assets most severely. For traders, this environment makes short positions in Bund futures an attractive hedge or outright directional bet.
Demand for Higher Yielding Bonds
Despite the bearishness on German debt, there is clear demand for higher-yielding European government bonds. The recent Italian BTP syndication drew a massive €157 billion orderbook, indicating investors are comfortable with Italian debt at these valuations. This suggests a relative value trade, favoring long BTP futures against short Bund futures, could be profitable.
The positive carry environment for Italian bonds makes holding them attractive while waiting for capital appreciation. The current spread between 10-year BTPs and Bunds is hovering around 165 basis points, a level that has historically compensated investors well for the additional risk. We recommend traders use futures or options to express a long BTP view, capitalizing on both the carry and potential price gains.
Looking ahead, we see the potential for further positive rating action for Italy as a key catalyst in the coming weeks. After S&P upgraded Italy’s outlook to positive last year, an actual upgrade could trigger a significant tightening of BTP-Bund spreads. Traders might consider buying short-dated call options on BTP futures to position for this specific event.
