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Italy has a golden opportunity in the bond market

With Italian yields now negative on bonds out to three years of maturity, the country is returning to semi-core status among euro area issuers.

Article originally published by Bloomberg. Hargreaves Lansdown is not reponsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

The new Italian government coalition of the Democratic Party and the Five Star Movement has been gifted a golden opportunity. The sharp drop in its sovereign bond yields means it can get ahead of its borrowing requirements for this year.

Italian yields have fallen to record lows recently as investors have welcomed an administration that’s somewhat less antagonistic to the euro zone than the previous one dominated by Matteo Salvini and his far-right League party. Yet everything is relative in a world of negative interest rates and Rome’s debt has been a serial under-performer when compared to its European peers. It’s time to catch up.

With Italian yields now negative on bonds out to three years of maturity, the country is returning to semi-core status among euro area issuers. A successful bond sale would cement that. It could be a political boon that helps Rome’s budget negotiations with Brussels by showing it has the investor stamp of approval.

Although Italian yields have fallen swiftly over the past month, there’s still a steep jump of 120 basis points between its two-year and 10-year notes. Its closest peers Spain and France have benefited from a so-called “bull flattening” of their respective curves, where yields on long-end notes have fallen faster than on shorter maturities. Germany’s 10-year bonds yield only 26 basis points more than its two-year bonds. So there’s considerable room for Italian improvement in terms of how much it has to pay investors for longer term debt.

Last year Italy struggled to sell its longer-dated bonds in the midst of its government crisis. But as the political temperature subsides (for now) Italy should take advantage of investors’ eagerness to grab any yield possible in Europe. Close to 80% of the country’s 250 billion euro ($276 billion) fund-raising target has already been achieved so the country’s in pretty good shape. But it could accelerate this and even start pre-funding for next year. When a sovereign issuer only has to pay interest of about 2% for ultra-long funding, and investor demand is strong, it’s prudent to lengthen your average duration of issuance.

With more than 20 billion euros of bond redemptions and coupons being paid by the Italian Treasury next week, bondholders will have money to reinvest so it’s perfect timing to gauge how strong demand is. That can be judged at Thursday’s regular Italian monthly auctions of medium- to long-term paper, with about 8 billion euros for sale including a 30-year maturity. This should indicate whether issuing a syndicated 20-year bond or even 30 years might be possible. Investor demand this year has skewed increasingly toward longer maturities as returns have turned negative across much of Europe.

If this summer’s desperate hunt for yield is any guide, Italy could feasibly raise as much as 10 billion euros. It would be a feather in the cap for the new coalition. Given the volatile nature of Italian politics, it’s smarter to sort out your debt-raising when the sun’s shining.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.


©2019 Bloomberg L.P. This article was written by Marcus Ashworth from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Article originally published by Bloomberg. Hargreaves Lansdown is not reponsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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