Italy’s sale of 30-year bonds drew strong demand on Thursday, locking in near-record low borrowing costs, in the latest sign of investors’ clamour for any eurozone debt offering extra yield above German Bunds.
The Italian Treasury received more than €90bn of orders from investors for the €8bn of debt on offer — second only to the €110bn of bids for two bonds sold in April. The debt was expected to price at a yield of 1.73 per cent, which would be the second lowest ever for 30-year Italian bonds.
The deal comes two days after the EU’s inaugural sale of bonds to fund its response to the Covid-19 crisis, which attracted record-breaking demand from investors. Although Brussels has a higher credit rating than Italy and offered lower yields, the €233bn order book for the EU debt demonstrated the hunger among investors for bonds offering a “spread” above Germany, which serves as a benchmark for debt across the euro area.
All German debt currently trades at sub-zero yields, with its 30-year bond at minus 0.18 per cent.
Bonds across the currency bloc have rallied in recent weeks, pushing their yields lower, on signs that inflation is lagging further behind the European Central Bank’s target of close to 2 per cent and that region’s recovery is faltering due to a surge in coronavirus cases. Expectations are running high that the ECB will respond by expanding its €1.35tn emergency bond-buying programme in December.
“I’m not sure the Italian deal would have materialised if the EU demand hadn’t been quite so strong,” said Antoine Bouvet, an interest rate strategist at Dutch bank ING. “I think there’s an overlap in the investor base for the two bonds, who see the ECB as a pretty warm comfort blanket to get out there and buy spread.”
Thursday’s sale, which was handled by BNP Paribas, Deutsche Bank, JPMorgan Chase, Banca Monte dei Paschi di Siena and Nomura, also included an operation to buy back some bonds maturing in 2021, 2023 and 2025. The exchange of shorter-dated debt for 30-year bonds shows the Italian Treasury is taking advantage of low yields to stretch out the average maturity of its borrowings, according to Mr Bouvet.
“Having more long-dated debt reduces refinancing risk if yields start to rise,” he added.
The €17bn of new EU bonds sold this week, whose proceeds will go to support jobs protection schemes in member states, have rallied in secondary trading. The 10-year bond now sits at a yield of minus 0.35 per cent, down 0.09 percentage points from where it was issued, meaning Brussels’ implied borrowing costs are now lower than those of France.
Investors are betting that financial support from the EU, including the upcoming €750bn recovery fund, will take the pressure off countries with higher borrowing costs such as Italy.
“The success of the EU bonds makes lower-rated credits in Europe look a little bit safer,” said Jim Leaviss, CIO of public fixed income at asset manager M&G Investments.