Italy unexpectedly becomes the "shock absorber" of European debt! Funds rush to buy Italian bonds, the 10-year interest rate spread hits the lowest level since 2008.

The Italian government is starting its 2026 financing plan with the issuance of a dual-tranche Euro bond, making use of the increasingly strong investor demand for its sovereign debt, and reshaping the flow of funds in Europe at a time when other major economies are facing political uncertainty. Compared to France, which is in a state of "hung parliament + minority government", and Germany, where the ruling coalition of the Union parties (CDU/CSU) and the Social Democratic Party (SPD) is not united and holds only a very thin majority in parliament, the political situation and economic growth trend in Italy appear more positive, attracting funds to the Italian bond market from Europe and globally. Italian government bonds (BTP) have shifted from being a representation of "Eurozone peripheral risk" to being one of the "sovereign assets investors are more willing to allocate capital to". In the backdrop of rising political and fiscal uncertainty in countries like France and Germany, Italy has become a "key buffer or shock absorber for European fixed income and low-risk funds". The most noticeable data reflecting this trend is the historic narrowing of the yield spread between Italian 10-year BTPs and German bonds, which has dropped to around 66 basis points, reaching the lowest level since 2008 (this indicator has long been seen as a "thermometer" for Italian sovereign risk). According to media reports citing sources, the country plans to sell a new 7-year benchmark sovereign bond, and also increase the issuance of its April 30, 2026 maturing green sovereign bond by 5 billion euros (approximately 5.8 billion US dollars). Strategists from Commerzbank AG predict that shorter-term securities could raise up to 10 billion euros. However, sources reveal that the demand for this dual-tranche issuance has already exceeded at least 190 billion euros. Sources mention that the pricing of this issuance is expected to be 7 to 8 basis points higher than comparable European sovereign bonds. At a time of this sovereign Euro bond issuance, the Italian government is becoming one of the preferred sovereign borrowers in the market. As political instability and concern over continued large-scale fiscal deficits put pressure on bond markets in countries, including France, the Eurozone bond market has been in turmoil in recent years. However, investors are flowing towards Italy due to the government's efforts to consolidate debt and its increasingly stable political and economic policies. This issuance comes directly after the record-breaking bond issuance by the Belgian government on Wednesday. The Belgian government raised approximately 8 billion euros through a 10-year bond, attracting over 91 billion euros in demand. Such large subscription books have become a key feature of January bond issuance, as borrowers take advantage of strong demand for fixed-income and low-risk funds, as well as relatively ample liquidity at the beginning of the year to secure financing. Global bond issuance has seen its busiest new year start, with various borrowers seizing the almost insatiable appetite of investors for bond fixed income assets. By the close of the US markets on Wednesday, companies and governments in the US, Europe, and Asia had borrowed approximately $260 billion in various currencies. Larger scale issuances are expected on Thursday and Friday. Italy is also benefiting from this trend of early-year borrowing. Last year, it attracted a record 142 billion euros on a 13 billion euro 10-year sovereign bond, which was part of a total 18 billion euro dual-tranche deal. Since then, the country's credit rating has been upgraded by all three major international credit rating agencies, further enhancing its investment appeal. With supply expected to remain high in the coming weeks, the Italian bond issuance will be closely watched as an indicator of whether the strong demand seen at the beginning of the year can continue. Italy faces competition in Europe, with the Portuguese government also issuing new 10-year sovereign bonds through major commercial banks, while France and Spain are conducting regular debt issuances. The latest statistics show that the yield spread between Italian government bonds and German government bonds, a key measure of the country's bond risk, has dropped to just 66 basis points, the lowest level since 2008. This is due to Prime Minister Giorgia Meloni's commitment to reducing the country's deficit and signals of political and economic stability. In Italy, lawmakers approved the 2026 budget last month, while in France, the high political negotiation costs and uncertainties in legislative and budgetary progress have significantly increased instability in core policy implementation areas such as budget cuts, immigration, and comprehensive welfare control. Bond underwriting issuances are typically more expensive than regular auctions, but they allow governments to quickly raise large amounts of funds while diversifying the investor base. The bookkeeping managers for this transaction include Barclays, BNP Paribas, Credit Agricole CIB, Banca Monte dei Paschi di Siena, Morgan Stanley, and Banca IMI. Italian government bonds have shifted from being "long-term close to junk status" to being a highly favored asset in the Euro bond market. Italy's sovereign credit rating has long been at investment grade, but after a downgrade by Moody's in 2018 to Baa3 (just one step away from junk status), it has only recently seen a substantive upgrade. The latest bond market orders and pricing indicate that "there is strong demand for Italian government bonds and a reduction in risk premium": the debut issuance of a dual-tranche Euro bond by Italy in 2026 has reportedly received orders exceeding 190 billion euros, priced only 7-8 basis points higher than comparable bonds, and has been described as one of the preferred sovereign borrowers in the market. The yield spread between Italian 10-year BTPs and German government bonds has dropped to around 66 basis points, the lowest since 2008, while this same spread indicator had risen to over 500 basis points during the 2011 Eurozone crisis, and had also reached around 300 basis points in 2018 during political shocks. Italy's 2026 budget aims to reduce the deficit to 2.8% of GDP (previously 3%), strengthening market confidence in its commitment to fiscal consolidation, combined with pressure on countries like France due to political instability and fiscal deficit issues. Capital flows are being reshaped, with Italy continuing to benefit, driving Italy from a core of Eurozone peripheral risk pricing to a relatively more credible shock absorber for funds, upgrading from high premiums near investment grade to a more favored asset in the current Eurozone market.