LONDON: Italy is just the latest major borrower to benefit from searing global demand for sovereign bonds, with investors casting aside concerns about the country’s relapse into recession to help the government lock in funding over the next 30 years.
Italy’s carpe diem sale is allowing it to raise 8 billion euros (US$9.1 billion) as investors scramble to lend to some of the world’s biggest borrowers, including Japan, the U.S. and Greece. The Italian offering of 2049 securities attracted orders in excess of more than 41 billion euros even as the economic outlook deteriorates for the euro-zone’s second-most-indebted country and it faces criticism from the International Monetary Fund on the need for reforms.
The impressive orderbook for Italy’s second syndicated sovereign sale this year follows reported records among neighboring euro-zone nations, and a four-times over-subscription for Greece. Moreover, this sale is helping Italy to front-load its 250 billion-euro fundraising effort this year, ahead of any potential squalls should its economic slowdown present a further challenge to budget projections. The latest sale follows a 10 billion-euro offering of 2035 securities in January that garnered 35.5 billion euros in offers.
Italy’s rapid return following its offering last month “speaks volumes about the current attractive backdrop for issuers,” said Rainer Guntermann, a Commerzbank AG rates strategist. The country seems set “to front-load as much funding as possible as uncertainties from politics or central banks may be looming later in the year,” he said in a note.
The borrowing rate on the new securities also looked set to beat expectations, with pricing of the new September 2049 notes at 18 basis points above benchmark rates. That’s as much as four basis points tighter than the initial price target, according to a person familiar with the matter, who asked not to be identified because they were not authorised to speak about it.
Italy has rushed back into the bond market as calm financial conditions and receding risks that central banks will raise interest rates are stoking demand for high-grade debt. Austria, Belgium and Finland all got record syndicated orderbooks in recent weeks. Further evidence of buoyant demand for fixed-income securities come from Japan’s offering this week, which received the strongest response for a 10-year sale in 13 years, soon followed by an upbeat 30-year auction.
In the U.S., Tuesday’s US$38 billion auction of three-year notes achieved a solid take-up and Wednesday’s US$27 billion 10-year auction was awarded at the lowest yield since January 2018. Greece, the nation hardest hit by the euro-area financial crisis, drew orders four times the size of its 2.5-billion-euro sale last week. And even further out the risk spectrum, serial defaulter Ecuador managed to sell US$1 billion in new debt.
Italian bonds notched up a third month of gains in January, buoyed by thawing political risk and diminishing investor conviction that the European Central Bank will be able to increase interest rates this year. The strong performance is a far cry from the market turmoil seen around the middle of last year, when the country found itself embroiled in a budget dispute with the European Union over plans to increase its spending above the bloc’s limits.
Mark Nash, head of fixed income at Merian Global Investors, said on Bloomberg Television that he was a bit concerned about the timing of Italy’s issuance because it was a “surprise to everyone.” Yet, while it suggested “a little bit of desperation” from Italy, he said “investors need yield in Europe and they’re still buying these sovereign bonds as they come.”
The outlook for Italian assets isn’t without risks. The economy has slipped into a recession after contracting through the last two quarters. Relations between the two ruling parties — the League and the Five Star Movement — have also been fraught, raising the possibility of early elections.
“It’s a lot of duration supply in a short period of time,” said Pooja Kumra, Toronto-Dominion European rates strategist. “Clearly the treasury wants to pre-fund as much as it can in this low-yield environment.”