Unloved Italian Bonds End Worst Year Since 2011 With a Flourish

(Bloomberg) -- Italy capped a volatile year in its bond market with an auction of debt that, by one measure at least, was the best since 2017.

Investor demand for the 10-year notes sold Friday reached levels not seen in 12 months, helped by the Treasury’s offer to sell less than the amount it usually does.

The outcome marks the end of a tumultuous year that saw investors in the nation’s bonds incur losses for the first time since the euro-zone financial crisis in 2011. Global investors have had to grapple with a host of a factors in Italy following an election that saw the formation of a populist coalition. Yields surged after the administration unveiled an ambitious fiscal-deficit target that was in breach of the European Union’s spending rules. The nation’s debt-to-GDP ratio, running at 130 percent, is the second-highest in the bloc.

Unloved Italian Bonds End Worst Year Since 2011 With a Flourish

The slump in bonds eased after the government backed down on its spending plans in a rapprochement with the EU. The bid-to-cover ratio in Friday’s auction of benchmark 10-year notes climbed to 1.53 times the amount offered, an improvement from the previous sale in November that saw demand at 1.41 times.

Remarks by Prime Minister Giuseppe Conte also supported investor sentiment on Friday. The level of debt “must be kept under surveillance, but it isn’t so scary,” Conte said at a year-end press conference, considering that the nation’s “economic fundamentals are very solid.”

In the secondary market, the yield on the nation’s 10-year bonds fell three basis points to 2.72 percent, while the FTSE MIB Index of shares rose as much as 1.8 percent. The benchmark debt securities now offer a spread of 248 basis points over those of Germany, still wider than 159 basis points at the end of last year.

Investors in Italy’s bonds incurred a loss of 1.3 percent this year, according to the Bloomberg Barclays Euro Aggregate Index for Italian Treasuries. That compares with a return of 2.5 percent for German notes and 3.2 percent for Portuguese debt.

©2018 Bloomberg L.P.