It might seem surprising that the spread between the yields of 10-year government bonds in debt-laden Italy and Germany has plummeted by more than 50bp over the past month or so, to <190bp, given the prospect of increasingly tight ECB policy – a message reiterated today by its president. After all, a rising policy rate in the euro-zone coincided with a big increase in the 10-year BTP/Bund spread earlier in 2022, and expectations for how the rate will evolve over the next couple of years haven’t really changed recently judging by developments in the overnight indexed swap market.
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