Bond Investors Count on ECB Stepping Up Buying, for Italy’s Sake

(Bloomberg) -- The stakes are rising for Italian bonds as investors snapping them up in record amounts are counting on the European Central Bank to boost its asset-purchase program next week.

Any failure by policy makers to deliver more life support is likely to see the securities continue their worst weekly losing streak this year. While S&P Global Ratings kept the nation’s BBB rating two notches above junk on Friday, the risk of future downgrades still hangs over the debt as the coronavirus hammers the region’s economy.

The ECB will set policy on Thursday, followed by a press conference with President Christine Lagarde. At the back of investors’ mind will be Lagarde’s comments at the last meeting in March, when she said the bank wasn’t there to close bond spreads, leading to a rout in Italian and Greek debt before policy makers announced the 750-billion-euro ($810 billion) pandemic emergency-purchase program a week later.

“Now would be an opportune time to up the PEPP pace, skew purchases even more towards BTPs and stand ready to double PEPP to 1.5 trillion euros before summer is out,” wrote Jamie Searle, a strategist at Citigroup Inc, in a note. “Investors need reassuring that it is safe to buy alongside the ECB.”

Searle targets the 10-year yield premium on so-called BTP debt over the German equivalent narrowing to 200 basis points from a current level of about 230 basis points. That would take it away from the 300 level seen as a sign of stress for the nation’s borrowing.

The ECB is seen increasing bond buying in coming months, according to a Bloomberg survey of economists, with one in four respondents expecting that could happen as early as Thursday. The timing and size is likely to be influenced by how much more stimulus governments are willing to commit.

Investors will be watching for any progress in the EU’s efforts toward longer-term action to tackle the coronavirus crisis. Northern European nations have so far dashed a Mediterranean desire for shared debt issuance, or so-called coronabonds.

• Sweden’s Riksbank announces its policy on Tuesday; the ECB’s Lagarde is the euro area’s sole scheduled central bank speaker next week, following the rate decision on Thursday
• The euro-area’s data calendar kicks off with March M3 money supply figures on Wednesday, followed Thursday by 1Q growth numbers, which are forecast to contract, and April inflation data
• German inflation numbers for April on Wednesday precede March retail sales and April unemployment data Thursday, which should give investors insight into the coronavirus impact

SUPPLY/REDEMPTIONS:

• Rainer Guntermann, rates strategist at Commerzbank AG, expects 13 billion euros of euro-area debt sales next week. He sees Finland is a prime candidate for a possible syndicated bond offering, after record orderbooks for Spain and Italy in the past week
• On Monday, Italy will announce the bonds to be sold Wednesday; Guntermann expects a five-year note with a 0.35% coupon maturing in February 2025 and a 10-year bond with a coupon of 0.95% due August 2030 to be sold for up to six billion euros
• Netherlands will sell up to 1.25 billion euros of bonds with a 2.75% coupon maturing in January 2047 on Tuesday
• The U.K. Debt Management Office will sell 3 billion pounds of gilts with a coupon of 0.875% maturing in October 2029 and as well as 1.2 billion pounds of linkers with a 1.25% coupon maturing in August 2028 on Tuesday. Also three billion pounds of bonds with 2.75% coupon maturing in September 2024 and another note with a 1.75% coupon maturing in January 2049 on Wednesday
• The Bank of England will buyback bonds across nine operations for 1.5 billion pounds each on Tuesday, Wednesday and Thursday
• Germany will sell 4 billion euros of bunds with a 0% coupon maturing in February 2030 on Wednesday
• Italy and Spain are scheduled to pay almost 40 billion euros of redemptions on bonds as well as around 10 billion euros of coupons next week
• On Friday Moody’s Investors Service reviews Netherlands’ Aaa rating, on which it holds a stable outlook

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