Italy's Summer Debt Sale Signals a Bond Market Onslaught

Italy sold 1.25 billion euros ($1.5 billion) of 30-year debt on Thursday — offering a yield of about 1.91% — along with three- and seven-year bonds. It’s the first time in a decade that it’s done a sale like this in the dog days of mid-August. Rome’s desire to beat the crowd suggests an onslaught of supply is headed our way from European sovereign issuers. 

National treasuries typically shun the summer break as investor participation thins out, which means you have to offer higher coupons to get sales away. But Italy clearly felt it could live with the weaker demand. Its bond yields have fallen sharply in recent weeks, after the European Central Bank started an emergency debt-buying program and the European Union agreed a 750 billion-euro pandemic rescue fund — signalling fiscal transfers from the wealthy north of Europe to the southern nations. 

Yields on Italy’s existing 30-year notes have dropped more than 100 basis points since late April.

Italy's Summer Debt Sale Signals a Bond Market Onslaught

Rome’s previous sales of 30-year bonds this year, raising 13 billion euros, were arranged via syndicates of banks. The last syndicated issue was done in April with a 3.13% yield, which shows how much more popular Italian debt has become in the intervening months. This latest sale was done via a regular auction, such was the confidence of getting it away without any problems. There was demand for 1.4 times the amount available. That’s not anything special, considering that the yield offered a juicy premium over other European debt, but it is August.

It makes sense for the Italian Treasury to take advantage of the benign conditions, as yields are lower now than they’ve been since before the lockdown. Rome still has about a third of its 350 billion-euro funding requirement left to raise this year.

Getting ahead of the game may be prudent. All of the major European countries will be raising a lot more debt over the next year, and they’ll be joined by the European Commission, which needs to sell bonds to pay for the EU pandemic fund. Of the rest of the big four euro debt issuers, Germany has more than 100 billion euros to sell; France has 60 billion euros; and Spain about 30 billion euros, according to analysts from NatWest Markets.

Governments will also be looking at huge funding needs for 2021, so treasuries will be trying to take advantage of rosy market conditions by forward financing where possible. With all this bond supply sloshing around, however, buyers will be able to pick and choose more. So don’t expect yields to fall much further.

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.

©2020 Bloomberg L.P.

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