Italy Drives Harder Bargain on Bonds After Investors Back Draghi


Italy’s new prime minister Mario Draghi got an early endorsement from investors who flooded a government debt sale with orders, allowing the country to secure a better price than it initially targeted.

After the bond sale went live on Tuesday morning, it was soon on course to rack up record orders of over 110 billion euros ($134 billion) for the 10-year portion, more than 10 times the amount on sale.

Italy’s Treasury then cut the yield it was offering on both maturities -- to 4 basis points above existing debt on the 10-year bond from initial guidance of 8 while the price on a 30-year inflation-linked maturity went to 22bps over the benchmark from 27. The combined transaction amounted to 14 billion euros.

The tightened pricing prompted many investors to walk away and the orderbook stood at around 65 billion euros on the 10-year bond by the time arrangers set final terms. That leaves the deal well short of the record 108 billion euros of demand set in June last year,

But the fact that Italy was able to sell the full amount it wanted at a cheaper rate than expected will be seen as a sign of ongoing investor optimism following Draghi taking the reins as premier at the weekend. The sale also took place with reflationary forces ripping through the region’s markets, which has the potential to erode the value of debt. ING Groep NV and UniCredit SpA are among those still bullish.

Italy Drives Harder Bargain on Bonds After Investors Back Draghi

Italian bond yields tumbled to record lows last week on signs that former European Central Bank President Draghi would lead a government with near-unanimous support. His crisis-fighting approach at the ECB, in response to a market meltdown in the region’s most-indebted economies nearly a decade ago, has seen investors pile into Italian debt.

“The market can continue surfing the Draghi wave for a while longer,” said Antoine Bouvet, senior rates strategist at ING, which sees the spread narrowing to 75 basis points over the next six months. “The Draghi effect is helping demand here.”

The nation’s 10-year yield spread over Germany, a key gauge of risk in the nation, narrowed to 89 basis points. Investors also placed 16.6 billion euros of orders for the 4 billion euro sale of 30-year inflation-linked debt.

Demand for government debt at auctions and syndications has stayed strong this year, as enormous central bank support outweighs reflationary fears creeping into the market. But in the secondary market, the yield on German benchmark debt climbed three basis points to -0.35%, the highest level since June. In the U.S. too, 30-year rates pushed above 2% to the highest level in a year.

Draghi’s main policy objectives will be to work out how to spend recovery fund money from the European Union and navigate the country’s way through the coronavirus crisis.

UniCredit strategists are also forecasting Italy’s premium over Germany to narrow to 75 basis points, alongside a flatter yield curve. It sees investors taking advantage of lower political uncertainty and ECB support to adopt “carry trades,” which involve buying bonds to collect the coupon payments.

Draghi should see success with recovery funds and structural reforms and “this will lead to lower domestic political uncertainty in 2021,” wrote strategists led by Luca Cazzulani. Under a “Super Mario” scenario, the spread could drop to 50 basis points, which was last seen in 2008, the bank said.

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