The 30-year Bund yields are nearing their highest levels in 15 years, showing bearish steepening in the market. Demand for recent bond issues is strong, especially as the BTP orderbook reached €157 billion.
Upcoming auctions are on the horizon, and the market appears ready despite bi-weekly SPGB and OAT auctions. These scheduled auctions will feature tenors of up to 23 years, and there is a positive carry environment noted.
Holding BTPs Due to Supportive Risk Sentiment
It’s wise to hold BTPs because of the positive risk sentiment in the market. The possibility of better rating actions is on the table after S&P’s recent positive outlook on its BBB+ rating.
The 30-year German Bund yields are now above 3.4%, reaching levels not seen since before the 2011 sovereign debt crisis. This rise in long-term rates is causing the yield curve to bear-steepen, a trend that derivative traders should watch closely. Traders might consider positioning for a wider gap between 2-year and 30-year yields, as the market adjusts to lasting inflation expectations.
This trend seems driven by stubborn core inflation figures seen across the Eurozone late last year in 2025, which have kept the European Central Bank from signaling any clear easing of policy. The market is now expecting rates to stay high for a longer time, which affects long-duration assets the most. For traders, this scenario makes short positions in Bund futures an appealing hedge or a direct bet.
Demand for Higher Yielding Bonds
Despite the negative outlook on German debt, there is clear interest in higher-yielding European government bonds. The recent Italian BTP syndication attracted an impressive €157 billion in orders, showing that investors are confident in Italian debt at these levels. This points to a relative value trade, where long BTP futures could be favored against short Bund futures.
The attractive carry environment for Italian bonds makes holding them appealing while waiting for capital gains. The spread between 10-year BTPs and Bunds is around 165 basis points, a historical level that has rewarded investors well for taking on extra risk. We recommend that traders use futures or options to express a long BTP view, benefiting from both the carry and potential price increases.
Looking ahead, there is potential for further positive rating action for Italy, which could be a key driver in the coming weeks. After S&P upgraded Italy’s outlook to positive last year, an actual upgrade could lead to a significant narrowing of BTP-Bund spreads. Traders might think about buying short-dated call options on BTP futures to prepare for this possible event.
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