The BTP-Bund spread indicates the differential (i.e. the difference) in yield between Italian and German government bonds. Expressed in basis points, it represents a summary that helps monitor the appreciation of the markets and financial operators with respect to Italy and Germany.
The spread between Btp and Bund is a very important thermometer for measuring the health of the economy of the two countries, especially for the Italian one, the nation with the highest debt within the Eurozone.
German government bonds are considered by international investors to be the reference benchmark among the countries of the Eurozone. The level of risk of other nations and their government bonds is calculated on the bonds of the first economy in Europe.
The riskier a country is, the more investors ask for an extra return compared to the interest rate obtainable by investing in German government bonds. A country with a healthy, thriving and expanding economy has fewer problems repaying its debt and therefore represents a less risky investment for investors.
In finance, a lower risk corresponds to a lower required return. If savers require a higher return on their investments it is because they consider it risky. An increase in the spread between Italy and Germany means this.
When we talk about the BTP-Bund spread, we are generally referring to the yield differential between Italian and German government bonds with 10-year maturity. The spread between the two government bonds can however also be understood for different maturities, such as 5, 7 and 30 years.
The value of the spread between Italian and German government bonds is expressed in basis points. 100 basis points are equivalent to 1%. If the 10-year BTP yields 2.8% and the 10-year Bund yields 1.4%, the BTP-Bund spread is equal to 140 basis points (1.4%).
