Italian banks are reinvesting heavily in government bonds amid Europe’s financial stability and US market turbulence.

Luca Moretti / European24 Financial Correspondent

A significant comeback is underway in European finance: after years of cautious retrenchment, Italian banks are once again turning enthusiastically towards Italian government bonds. Recent market shifts, regulatory developments, and transatlantic economic turbulence have opened a new “golden window” for institutions to invest in sovereign debt, reshaping the dynamics of banking and public finance across the continent.

Italian Banks Rebuild Their Positions in Sovereign Debt

Over the past two years, the volume of Italian government bonds held by domestic banks fell from more than €430 billion to approximately €370 billion by the end of 2024. The decline coincided with the winding down of the European Central Bank’s TLTRO (Targeted Longer-Term Refinancing Operations) programme, which provided significant liquidity injections — particularly to Italian lenders.

However, the landscape has dramatically shifted. Unlike the crises of the past — such as during the eurozone turmoil of 2011, when banks were politically pressured to absorb sovereign debt amid a flight of foreign investors — today’s resurgence is rooted in opportunity rather than desperation.

Washington’s Woes, Europe’s Gain

Paradoxically, the trigger for renewed Italian interest comes not from within Europe, but from across the Atlantic. The United States, under President Donald Trump’s second term, faces rising yields and waning international confidence in its Treasury bonds. Protectionist policies, tariffs, and attempts to limit foreign control of US debt have rattled global markets, weakening the dollar and undermining Treasuries’ traditional role as safe-haven assets.

In response, the US administration is considering easing banking regulations to allow domestic institutions to hold more government bonds without breaching leverage ratio requirements. However, many analysts believe this deregulation will not grant American banks a competitive advantage — quite the opposite.

The weakening of the dollar and the volatility in Treasury yields expose US debt to mounting risks, inadvertently making European government bonds — especially Italian BTPs — look increasingly attractive.

Europe’s Moment: Italian Bonds Shed the “Risky” Label

While Washington navigates stormy waters, the European Union enjoys a rare spell of relative calm. Inflation across the eurozone remains under control, allowing the ECB to maintain or further reduce its base interest rate, currently at 2.5%.

Italy, often viewed as the financial enfant terrible of Europe, is undergoing a transformation. The public deficit is stabilizing, bolstered by government discipline and culminating in an upgrade of Italy’s sovereign rating to BBB+ by S&P Global Ratings in April 2025. This has fundamentally altered perceptions: Italian bonds have lost much of their previous stigma as “risky” assets.

Over the past 18 months, more than €100 billion of foreign investment has flowed into Italian debt markets, driving the BTP-Bund spread down to a mere 111 basis points and the 10-year BTP yield to around 3.5%.

Carry Trade: The New Financial Strategy

In this environment, banks are perfectly positioned to exploit the classic “carry trade” strategy: borrowing short-term at low rates to invest in higher-yielding long-term bonds. Italian institutions can finance themselves at 2.5% while earning around 3.5% on sovereign debt — a healthy 100-basis point spread.

Moreover, should the ECB proceed with further rate cuts — a possibility hinted at due to continued economic stability — this spread could widen even further, enhancing profitability.

Unlike the United States, where the Federal Reserve remains constrained from cutting rates due to inflationary pressures from tariffs, Europe enjoys the luxury of monetary easing without risking runaway prices.

Banking Union and the New European Opportunity

The timing could not be better for Italian banks, whose balance sheets and profitability metrics have strengthened considerably over recent years. With risk perceptions lowered and profitability opportunities rising, Italian financial institutions may be poised to not only regain but expand their influence within the European banking sector.

This could play a critical role in accelerating long-stalled discussions over completing Europe’s Banking Union. Stronger banks in southern Europe, particularly in Italy, could deprive “frugal” northern states of their traditional arguments for imposing stricter regulatory burdens on countries with higher public debt.

In short, Italy’s financial renaissance might finally bring about the deeper integration that European banking policymakers have long dreamed of — but which crises had made seem impossible.

A Rare Convergence of Factors

It’s been decades since Italy — and Europe — last saw such a favourable alignment of financial and political conditions.

For Italian banks, this could be a historic opportunity to consolidate strength, expand influence, and ensure financial sovereignty by supporting their own nation’s debt markets.

For Europe, it is a rare window to stabilise and strengthen integration from within.

And for the world, it is a striking reminder: in a time of global turbulence, old assumptions about safe havens and financial dominance are being rewritten — and Italy is scripting an unexpectedly bright chapter.