Italy draws investors to 50-year debt deal with prudent pricing


Newsletter: Europe Express

Italy has drawn strong demand for its first new 50-year bond in five years after the country cautiously valued the deal at a time when very long-term debt came under heavy selling pressure.

The deal only marks the second time Italy has offered a new half-century bond as it seeks to lock in favorable borrowing costs to fund a large Covid-19 recovery spending program.

The offer follows a similar issue by eurozone peers, including France and Spain, earlier this year. Countries have moved to take advantage of low borrowing costs at a time when growing optimism about the global economic outlook has already started to push yields significantly higher.

Floortje Merten, bond strategist at ABN Amro, said the Italian offer “is part of a long-term issuance trend that we have seen recently in the sovereign space, as issuers lock in interest rates low “.

The new debt returned 2.2%, or 0.47 percentage points above a 30-year Italian bond. That represented a premium of around 0.04 percentage point above the “fair value” that the eurozone issuer would have to pay to borrow for five decades, according to analysts at Milan-based UniCredit.

Italy’s prudent pricing has helped bankers secure € 64 billion in orders for the € 5 billion on offer. The country last called on the old 50-year bond in 2019 after the maturity began in 2016.

Bonds with long maturities have seen particularly strong sales this year, as investors fear that stronger economic growth may ultimately lead to a rebound in inflation. Higher price growth is particularly damaging to long-term bonds because it erodes the value of the fixed income streams they provide.

The 50-year Italian bond is trading at a yield of 2.06%, down from a low below 1.7% in mid-February, signaling a sharp drop in the price of debt.

European governments’ spending on coronaviruses has led them to tap the capital markets at a record pace. The first quarter was marked by a wave of long-term issuance as bond syndications, which are managed by investment banks, reached their highest volume on record. But the average borrowing costs of these operations remained lower than last year despite the sharp increase in borrowing and the global rise in bond yields driven by inflation fears in the United States.

The European Central Bank’s extensive bond-buying program has pushed demand towards new offerings, where it is easier for investors to secure larger blocks of debt, analysts said.

By mid-February, major EU borrowers had already issued more bonds with maturities of 30 years or more than throughout 2020, according to Imogen Bachra, European rates strategist at NatWest Markets.

Demand for Italian debt has been robust in the primary market this year, partly reflecting investor confidence in Prime Minister Mario Draghi. The former ECB president, who is widely credited with easing the bloc’s debt crisis ten years ago, became prime minister in February.

“We know Mario Draghi is the guy who gets things done,” said Cosimo Marasciulo, Head of Absolute Return at Amundi. Draghi’s management of EU stimulus funds would be crucial for Italy’s long-term economic prospects, he added.

Draghi said last month he would increase government support for the economy by € 32 billion to help Italian businesses and workers overcome a new round of lockdown measures to contain a third wave of infections.

Marasciulo said the relatively generous price of the new bond shows that the national treasury is taking a cautious approach to ensure good reception. “The treasure is not taking risks,” he said.

A debt sale staged days after Draghi was sworn in as prime minister in February drew a record € 110 billion in orders for a 10-year bond. More than half of those orders fell as the borrower asked for better prices, even though the deal still ended heavily oversubscribed.

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