Italy’s public deficit compared with GDP fell to -1.4% in the fourth quarter. This was down from 3.4% in the previous period.
This sharp drop in Italy’s deficit-to-GDP ratio signals a major improvement in the country’s fiscal health, which should lower its borrowing costs. We should expect the spread between Italian 10-year government bonds (BTPs) and German Bunds to tighten significantly. The BTP-Bund spread has already narrowed to around 115 basis points in recent weeks, and this news could be the catalyst to push it below the key 100-point psychological level.
BTP Bund Spread Trade Setup
A direct way for us to position for this is through futures markets by going long on BTP futures and shorting German Bund futures. This spread trade isolates the bet on Italy’s improved credit profile from the general direction of European interest rates. This is a bet on convergence as Italy’s perceived risk diminishes.
The positive fiscal outlook should also provide a tailwind for Italian equities. Lower sovereign risk translates into a lower cost of capital for Italian companies, boosting valuations and investor confidence. The FTSE MIB index, which already saw a lift after Q1 2026 GDP growth was revised up to 0.5%, could now attract further capital inflows.
To capitalize on this, we can buy call options on the FTSE MIB index, providing upside exposure with a defined risk. Alternatively, selling out-of-the-money put options is a viable strategy to collect premium, based on the view that this news provides a new, stronger floor for the market. This is a view that acknowledges the fiscal consolidation efforts we saw throughout 2025 are now bearing fruit.
This development is also supportive for the Euro, as it reduces systemic risk within the currency bloc. With the European Central Bank having held its main interest rate steady at 2.75% for the past two quarters, this strong fiscal data may give them more flexibility. We should consider long EUR/USD positions via options or futures, anticipating that a fiscally sounder Eurozone will attract international investment.
