Italy draws blockbuster demand in first bond sale of Draghi era

February 16, 2021 0 By boss


Investors raced for a slice of Italy’s first bond offering since Mario Draghi was sworn in as prime minister, allowing the country to sell 10-year debt at one of the lowest borrowing costs on record.

The fiery demand for the €10bn offering underscores how economic prospects under the former European Central Bank chief have collided with a rush by investors to lock in positive returns that are scarce across the eurozone debt market.

The deal attracted €110bn in demand before the order book closed, according to a term sheet seen by the Financial Times. That exceeded the €108bn in the last 10-year deal organised by investment banks in June last year, which held the record for the biggest syndicated Italian bond sale.

The demand declined to €65.5bn by the time the order book closed, with bankers pushing for better pricing on the deal than was initially expected.

The bond was set to price at a yield of about 0.57 per cent, or 0.04 percentage points higher than the outstanding benchmark, the term sheet said. That would mark a better outcome than the initial price indications, which pointed to a premium of 0.08 percentage points.

The robust debt deal came as investors expect Draghi, who is widely credited with easing the bloc’s debt crisis a decade ago, to deliver stronger Italian economic growth after a historic recession last year.

Draghi is due to address lawmakers for the first time on Wednesday, when he is expected to lay out his economic plans. He comes into office with a big parliamentary majority that will help him push through his initiatives.

Italian debt has rallied sharply in recent weeks, sending the closely watched gap between the country’s 10-year borrowing costs and those of regional haven Germany to a six-year low of less than 0.9 percentage points. The so-called spread had surged higher than 2.75 points during the height of the coronavirus-induced market tumult last year.

Line chart of percentage points showing how Italy-Germany spread has tightened thanks to Draghi boost

Analysts are optimistic that Draghi, who was sworn in as premier three days ago, will be able to efficiently deploy the vast recovery fund underwritten by EU member states and enact a series of political and economic reforms to shore up the crisis-hit economy.

“We expect Mr Draghi will be successful in finalising the Recovery and Resilience Fund and in starting a process of structural reforms, and that this will lead to lower domestic political uncertainty in 2021,” said Luca Cazzulani, co-head of strategy research at UniCredit in Milan.

Cazzulani said he expected the Italy-Germany spread to shrink to 0.75 percentage points, with investors pumping between €50bn and €90bn into Italian government bonds. He added that if Draghi was successful in his reforms, the risk of Italy losing its investment-grade credit rating, which was seen as a significant concern in recent years as it has faced a series of political crises, would “no longer be priced in”.

In an even more upbeat outcome, which Cazzulani dubbed the “Super Mario scenario”, the spread could even fall to 0.5 points, a level last seen before the global financial crisis in 2008.

“For this to occur, positive surprises on the political and growth front would be needed,” he said, referring specifically to “evidence that the government can swiftly approve bold reforms which help growth potential for Italy move to a higher path in the coming years”.

Additional reporting by Miles Johnson in Rome


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