Published March 07, 2013
Italy's Treasury is likely to go ahead with debt auctions this month as planned as it believes investors remain relatively positive about the country's bonds despite the current political stalemate.
With a hung parliament following last week's elections threatening to delay reforms needed to spur growth and cut Italy's massive debts, Rome is due to sell at least 35 billion euros of bonds at auctions next week and late in the month.
Analysts also expect the Treasury to announce a new sale soon of BTP Italia bonds tailored towards retail investors. The debt calendar shows there are no bond redemptions next month, which could make it harder to find demand for longer-dated paper as investors won't have maturing debt to roll over.
But as long as market volatility remains in check, traders and analysts expect the Treasury to continue its strategy of trying to lengthen the average life of Italy's debt.
"Italy will carry on reducing short-dated issuance and be active on the ultra-long maturities,'' a trader at a specialist bank forecast. ``It's true that the elections brought political uncertainty, but are we sure it will fade away going forwards?''
Italy's debt had an average tenor of 6.54 years at the end of February - still relatively long but having shrunk from around seven years before the country moved to the forefront of the euro zone's debt crisis in late 2011.
Rome stepped up issuance of ultra-short-dated bills in early 2012 to tackle a 60 billion euro refinancing hump, while the European Central Bank's pledge in September to buy bonds of countries that ask for help in maturities of up to three years has also helped concentrate demand in shorter maturities.
15 YEARS OR MORE
The Treasury will announce its March borrowing schedule later on Thursday and on Friday. Analysts expect 16-19 billion euros of bonds, including those sold at the end of the month, which will be settled in
early April. Some 19 billion euros of short-dated Treasury bills falling due in March will also be partially rolled over.
The Treasury is seen offering 8-10 billion euros of bills at next week's auctions, together with three-year BTP bonds and some floating-rate CCTeu paper. It may also seek to raise funds at the longer end of the curve by reopening recent 15- or 30-year issues, issuing a total of 6 billion euros in bonds.
"If they do not offer the 15-year it would mean they are getting ready to return to a 30-year maturity,'' one trader said. The head of Italy's Debt Management Office said on Wednesday the treasury aims to sell a new 30-year bond as soon as possible and a new 10-year inflation-linked issue.
Maria Cannata said an ``ideal'' combination of low risk and high yield meant demand for Italy's bonds remains strong despite the political paralysis that risks efforts to bring its 2 trillion euros of public debt under control. Ten-year Italian borrowing costs rose to their highest in four months at a debt auction last week, at 4.83% from 4.17% in late January, although the ECB's as-yet-untested pledge to buy bonds has helped stabilise the secondary market.
Italy's 10-year bond was yielding 4.62% on Thursday, compared with a yield of 1.45% for debt of the same maturity issued by euro zone "safe haven'' Germany. The ECB is expected to eschew dramatic action at its monthly rate meeting on Thursday, despite fears that political turmoil in Rome could reignite the bloc's debt crisis.
Some investors have begun to question the value of the ECB's backstop, however, given that it would require a government committed to the economic reforms and debt-cutting austerity measures decisively rejected by Italians at the polls.
ING fixed income strategist Alessandro Giansanti said the Treasury would make significant changes to its strategy only ``if and when 10-year borrowing costs rise above 6%'' - the level seen before the ECB's September bond-buying pledge.
"I expect also a new tranche of BTP Italia this or next month,'' Giansanti said.
The Treasury said in December it aimed to sell two tranches in 2013 of the four-year BTP Italia, a retail-targeted bond launched last year that proved highly popular with household investors, but that this would be beside regular auctions.
The flying start Italy has made to this year's funding programme, more than a quarter of which has already been completed, means it could afford to ease off the pace if Rome's political crisis makes investors reluctant to buy its debt.
The mid-March auctions will come just days before parliament opens on March 15, after which formal consultations on building a new coalition government can begin.
If centre-left leader Pier Luigi Bersani fails to form an administration after receiving an initial mandate, the president may appoint a new technocratic government to replace that of
outgoing prime minister Mario Monti.
However, 5-Star Movement leader Beppe Grillo, who holds the whip hand after winning a huge protest vote, insists he would not support such an administration. If no government can be formed, Italians may have to go to the polls again.
"Investors are sitting on the fence to see whether the election could yet bring some positive outcome,'' said Riccardo Barbieri, chief European economist at Mizuho international.
If some sort of reform-minded government emerges from the political mists, end-month sales could be easier. At auctions scheduled on March 25-26 and 27, analysts expect a new five-year bond worth an initial 4 billion euros, plus the usual six-month bills, two-year zero-coupon bonds, linkers and 10-year paper, for a total amount of around 20 billion euros.