Tags: Italy | Inflation | Bond

Italy Scores Big Hit With Inflation-Linked Bond

Thursday, 22 March 2012 09:53 AM

Italian households have snapped up a cleverly targeted inflation-protected government bond this week, a vote of confidence in promised economic reforms the government needs to revive international demand for Italy's long-term debt.

Orders for the retail-focused bond were already nearing 7 billion euros midday on Thursday, the last of a four-day sale, pointing to a final issue size several times the 1.5 billion euros initially anticipated by analysts.

The bumper sale, which is intended to lower the future size of T-bill auctions, feeds into Italy's coffers as it faces bond maturities of 27 billion euros in April. It will also help it curb a recent short-term slant in the country's debt profile.

"It's a brilliant attempt to modify the investment habits of (Italian households)," a senior trader at a primary dealer said.

"The bond is appealing, the placement method more transparent, the timing is right and there's been decent marketing."

The average life of Italy's debt has fallen to 6.8 years - still relatively long - from seven years after it boosted issuance of ultra-short-dated bills in the first few months of 2012 to work through a 60 billion euro refinancing hump.

There has been a general fall in yields driven by the European Central Bank's liquidity splurge, which armed Italian banks with 255 billion euros of three-year funds. Growing faith in technocrat Prime Minister Mario Monti's ability to push through reforms to help the economy grow has also helped.

But the boost from the ECB's cheap loans has been concentrated in shorter maturities and demand from the foreign buyers Italy needs to finance it over an extended time horizon remains elusive.

Italy has not sold a bond of more than 10 years' maturity since October and Deputy Economy Minister Vittorio Grilli said this month the time was not yet right to test market appetite for longer-dated debt.

"I think they could somehow manage to place a 15-year bond but a 30-year one would be much more problematic," said Alessandro Tentori, a strategist with BNP Paribas in London.

Italy last sold a 2040 BTP bond in May last year, before concerns about its 1.9 trillion euro debt and poor economic growth thrust it centre-stage in the euro zone debt crisis.

The most recent sale comes as Monti's government fights to seal a historic labor market reform to boost Italy's productivity and economic prospects.

Markets hope its efforts will bring the euro zone's third-largest economy onto a growth path that can sustain and ultimately reduce the world's fourth-largest public debt burden.


While it will take more work for Italy to revive international appetite for ultra-long debt, traders say the latest investment product has hit the market at the right time and succeeded in steering demand from small investors towards a longer maturity.

Italians have a tradition of parking their savings in short-term BOT bills. But the ECB's liquidity boost has pushed Italian one-year yields to their lowest level since 2010. They fell to 1.4 percent at an auction this month - when Italy's inflation is running at 3.3 percent annually.

Unlike existing Italian linkers, the BTP Italia is tied to domestic inflation — traditionally higher than the euro zone average. "Italian inflation is there to stay," said Fabio Fois, an economist at Barclays Capital in London.

In an innovative feature, the new bond — which private investors can for the first time buy directly online on an electronic trading platform — adjusts the capital for inflation every six-months.

With a net wealth of 340,000 euros ($448,500) each, Italian households are the wealthiest in the Group of Seven advanced economies, according to Morgan Stanley. Their financial assets total 3.6 trillion euros, with 5 percent in Italian bonds.

They stayed loyal to them even as the debt crisis reached a peak in late 2011.

Italy successfully held a "BTP-day" on Nov. 28 in which small investors rushed to buy its bonds with no bank fees. A day later its three-year yields jumped to a record 7.9 percent at auction, pushed by fears about debt sustainability.

High approval ratings for Monti's reform-driven government are seen helping demand for the bond.

"The Treasury would have probably met retail interest for such an issue some time back, but maybe not to this extent," Fois said. "The climate in Italy has changed and it shows."

But the Treasury is not banking on patriotism alone.

It will pay at an interest rate of least 2.25 percent on the new bond, with expectations the inflation-tied component to drive the effective coupon above 4 percent.

© 2018 Thomson/Reuters. All rights reserved.

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Thursday, 22 March 2012 09:53 AM
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