Italy draws investors to 50-year debt deal with cautious pricing

Italy drew robust demand for its first new 50-year bond in five years after the country cautiously priced the deal during a time when ultra-long term debt has sustained heavy selling pressure.

The deal marks only the second time Italy has offered a new half-century bond as it seeks to lock in favourable borrowing costs to fund a big Covid-19 recovery spending programme.

The new debt was set to price at 0.47 percentage points above a 30-year Italian bond maturing in 2051, which is at present trading at a yield of around 1.71 per cent. It marked a premium of about 0.04 percentage points to the “fair value” the eurozone issuer would be expected to pay to borrow for five decades, according to analysts at Milan-based UniCredit.

The offering follows similar issuance by eurozone peers including France and Spain earlier this year. Countries have moved to take advantage of low borrowing costs during a time when rising optimism over the global economic outlook has already begun pushing yields markedly higher.

Floortje Merten, fixed-income strategist at ABN Amro, said Italy’s offering “fits in a trend of long-term issues that we’ve seen in the sovereign space recently, as issuers are locking in low interest rates”.

Italy’s careful pricing helped bankers drum up €64bn in orders for the €5bn that was on offer. The country last tapped the older 50-year bond in 2019 after debuting the maturity in 2016. 

Bonds maturing well into the future have endured particularly intense selling this year as investors worry that more vigorous economic growth will ultimately prompt a rebound in inflation. Higher price growth is particularly damaging to long-term bonds because it erodes the value of the fixed income streams they provide.

Italy’s current 50-year bond is trading with a yield of 2.06 per cent, from a low below 1.7 per cent in mid-February, signalling a steep fall in the price of the debt.

European governments’ coronavirus spending has led them to tap capital markets at a record pace. The first quarter saw a rush of long-dated issuance as bond syndications, which are run by investment banks, chalked up their highest-ever volume. But the average borrowing costs for these deals remained lower than last year despite the surge in borrowing and the global rise in bond yields led by fears of US inflation. 

The European Central Bank’s extensive bond-buying programme has pushed demand into new offerings, where it is easier for investors to secure larger blocks of debt, analysts say.

By mid-February, major EU borrowers had already issued more bonds maturing in 30 years or longer than in all of 2020, according to Imogen Bachra, European rates strategist at NatWest Markets.

Demand for Italian debt has been robust in the primary market this year, in part reflecting investors’ faith in Prime Minister Mario Draghi. The former ECB president, who is widely credited with easing the bloc’s debt crisis a decade ago, became premier in February.

“We know that Mario Draghi is the guy that gets things done,” said Cosimo Marasciulo, head of absolute return at Amundi. Draghi’s handling of EU recovery funds would be crucial for Italy’s long-term economic prospects, he added. 

Draghi last month said he would boost government support for the economy by €32bn to help Italian businesses and workers weather a new round of lockdown measures to contain a third wave of infections. 

Marasciulo said the relatively generous pricing for the new bond showed the national treasury was taking a cautious approach to ensure a good reception. “The treasury is not taking a risk,” he said. 

A debt sale held days after Draghi was sworn in as prime minister in February drew a record €110bn in orders for a 10-year bond. More than half those orders dropped away as the borrower pushed for better pricing, although the deal still ended heavily oversubscribed.