New Italian Debt Offers 0% Interest for First Time

(Bloomberg) -- Investors snapped up Italy’s first sale of bonds that lack a fixed interest payment, the latest sign of how the desperate hunt for returns has wiped out yields on some of Europe’s riskiest assets.

The country raised 3.75 billion euros ($4.4 billion) from a new three-year, 0% coupon debt at auction on Tuesday. The offering was 1.4 times oversubscribed, signaling slightly slower demand than at the previous sale, and bond prices dipped after the result.

Still, the solid auction shows investors are still keen on the country’s debt even though it no longer offers the juicy yields once associated with risk. Driving the recent rally in so-called BTP debt is a combination of a government looking more stable after recent regional elections, and the European Central Bank’s supportive asset purchases.

“Fear of missing out is taking hold of Italian bonds as the ECB has compressed the tail risk of a euro break-up,” said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. “The sweet spot for carry remains in Italian bonds, particularly at the front end.”

The European Union’s recovery fund plans also make the outlook safer, with the yield premium over Germany -- a risk gauge -- at the lowest since May 2018. The average yield in the auction was the lowest on record at minus 0.14%, a far cry from the 2.4% reached in March amid coronavirus lockdowns.

Italy’s three-year bonds in the secondary market fell after the sale, with yields up two basis points at minus 0.23%, having touched a record low of minus 0.25% earlier in the day.

The Treasury also sold seven and 30-year securities, raising its targeted amount of 7.5 billion euros. A gauge of demand for the 30-year debt held steady, with market yields falling as much as four basis points to a fresh record low of 1.49%.

“Investors still look happy to extend in BTPs,” said Peter McCallum, a rates strategist at Mizuho International Plc. “Spreads have widened out slightly after the auction but the curve continues to flatten.”

The demand is also partly being driven by Japanese investors who can benefit from positive yields on a currency-hedged basis, Bloomberg Intelligence’s Sandhu said in a report.

While the country still faces the risk of a sovereign downgrade when S&P Global Ratings reviews its BBB rating on Oct. 23, Barclays Plc strategists including Cagdas Aksu see the supportive market factors as potentially keeping the rating steady.

“Momentum for BTPs is positive and we expect the supply/liquidity outlook into year-end to be favorable,” said Chiara Cremonesi, a rates strategist at UniCredit SpA, in a note.

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