Market bets on new 50-year Italian bond with launch of Draghi's government

ROME: With Mario Draghi set to become Italian prime minister, analysts see scope for Rome to issue an extra-long bond, cashing in on ultra-low interest rates and buoyant sentiment over the former European Central Bank chief taking office.

The Italian Treasury sees overall issuance in 2021 broadly in line with last year's 551 billion euros ($668.2 billion). Funding needs rose in 2020 due to the economic impact of COVID-19, with sales of medium-to-long-dated bonds rising by 110 billion euros.

"With the ECB buying, curves flattening and the 2067 bond now quite old, I would have expected them to have already issued a 50-year BTP by now," said a primary dealer who asked not to be named, adding that Draghi's arrival was "a perfect opportunity".

The Treasury's issuance guidelines for 2021 already include plans for a 50-year bond and France, Belgium and Spain have all issued long-maturity paper in recent weeks.

Slovenia raised 60-year debt in January, while Austria sold a 100-year bond last June.

A recent fall in interest rates and flattening of the curve have made the 50-year tenor more appealing than the more usual 30-year for issuers, UniCredit analysts wrote.

"Market conditions are unlikely to remain as favourable as they are now for the extra-long segment," they said.

Expectations of further fiscal stimulus measures, especially in the United States, have eased fears of a rise in inflation that could weigh on the long end of the curve.

Long-dated euro zone government bond yields rose on Wednesday after a 50-year bond sale by Spain in the previous session.

The $1.9 trillion stimulus programme in the United States would lift the yields of major global bond markets, according to analysts.

The ECB expanded its asset purchase programme to 1.85 trillion euros at the end of last year and many believe more rather than less stimulus is likely in the months ahead.

One trader who declined to be named said on Friday the 50-year sale was likely to come some time between late February and the end of March. Market conditions were likely to get even better once the government was up and running, he said.

A fixed income strategist who asked not to be named said a new issue could be priced to yield 1.8/1.9%, as the existing 50-year BTP maturing in March 2067, which carries a 2.8% coupon, currently yields just below 1.7%.

Saxo Bank strategist Althea Spinozzi said a 50-year bond sale was more probable in June or July, following an anticipated honeymoon period for Draghi and a possible easing of the pandemic.

'DRAGHI-BOND'

Since Draghi was asked to form a government, the Milan stock exchange has gained 5.7% against a European average of 1.8%. The BTP-Bund spread has fallen below 90 basis points, the lowest since March 2015, with Italy's 10-year yield at historic lows.

Draghi on Wednesday concluded his second round of consultations with parties. Most have pledged their support, setting up a large parliamentary majority, and the government is expected to be sworn in before the beginning of next week.

A dealer operating on the primary market said that with Draghi installed as premier, the Treasury may also consider issuing 100-year paper or even a perpetual bond, which, he said, would be seen as a "Draghi bond".

Extra-long bonds are usually bought by insurers and pension funds with liabilities to match.

If the Treasury decides against a 50-year bond, it might consider a 20- or 30-year syndicated offer, or perhaps test the retail market with a BTP Futura, two market players said.

Italian debt management chief Davide Iacovoni has said the Treasury will continue to serve retail investors this year, issuing at least one BTP Futura with a maturity of no less than eight years..

The current 50-year benchmark, was issued five years ago at a size of 5 billion euros then reopened at auction in 2017 and 2018 and through syndication in 2019, giving it an outstanding size of 9.63 billion euros.