Italy Bonds Primed for Gains as Deliverance Day for ECB Beckons

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Italian bonds stand to gain the most next week if the European Central Bank’s stimulus measures meet market expectations.

Should the policy maker deliver a big enough boost to its bond buying program, Societe General SA expects the nation’s 10-year securities will rally, driving the yield premium over their German counterparts to 90 basis points, the lowest level since December 2015.

Italy Bonds Primed for Gains as Deliverance Day for ECB Beckons

The spread -- often seen as a key gauge of risk in the region-- has already dropped over 200 basis points since the height of the pandemic in March, spurred by expectations of further easing. According to a Bloomberg survey of analysts, the central bank will boost its emergency bond-buying program, and extend the exceptional terms on long-term loans it offers banks when it sets policy Thursday.

Italian debt securities have long been considered some of the region’s riskiest. But thanks to the ECB’s backstop and the prospect of the European Union recovery fund, the scope for volatility has been greatly reduced, increasing their appeal.

“For 2021 we say ‘forget fundamentals for now’ and focus on flow dynamics,” strategists including Adam Kurpiel wrote in a note to clients, saying foreign investors could purchase an estimated 20 billion euros ($24.3 billion) to 25 billion euro more of the securities. Next “week is delivery time for the ECB,” they said.

ECB President Christine Lagarde and her colleagues have taken every opportunity to drop hints of possible measures. Last month, Lagarde said bond-buying and ultra-cheap loans were likely the main tools of choice to help the region’s economies.

Debt Sales

Germany, Italy and Spain are expected to sell a total of 13.5 billion euros bonds next week, according to Commerzbank AG.

  • Germany pays 12 billion euros of redemptions next week, its last scheduled payment until January; no coupons will be paid
  • The U.K. will offer just under 8 billion pounds of three-, 15- and 30-year debt next week; the BOE will buy back 4.4 billion pounds of debt across three operations
  • Data for the coming week is mostly relegated to second-tier, backward-looking figures with the exception of Germany’s ZEW figures on Tuesday
  • Lagarde speaks at the press conference following the monetary decision on Thursday
    • BOE publishes the financial stability report on Friday
  • Fitch Ratings reviews Spain and DBRS Ltd. reviews U.K. on Friday

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