In the summer of 2012, as peripheral eurozone yields skyrocketed and Italy was being tipped as the next recipient of an EU bail-out, few would have believed that it could have a 15 year and a 30 year benchmark under its belt before spring 2013 had ended.
That it did — and that both were blow-out trades — is testament to the changing fortunes of the eurozone debt markets since European Central Bank president Mario Draghi pledged to do “whatever it takes” to save the currency bloc in July 2012.
Regardless of the underlying reasons for the recovery, Italy did not waste time in taking advantage.
“Our issuance in the longer part of the curve, above 10 years, is now similar to that of 2010,” says Maria Cannata, director general of the public debt directorate within the Italian treasury in Rome.
“Foreign investors have also been more involved than last year.”
It is a different trend — improved economic outlooks for the eurozone — that is shaping Italy’s market assault for the rest of the year, however.
“We are proceeding well in our funding target so we could just rely on auctions for the rest of the year,” says Cannata.
“If we do come with another syndication, it would be a new 10 year inflation-linked bond because the existing benchmark is already quite large and there may be limited opportunities to tap it further.”
But investor demand for inflation linkers is driven by their belief that eurozone economic conditions will improve — something on which consensus is lacking for the moment.
“We need a more consolidated opinion before we can proceed,” says Cannata.
Italy has a proven track in bonds linked to domestic inflation. The sovereign received more than €17bn of orders for a four year bond aimed at retail investors in April. The debt — dubbed BTP Italia — is linked to Italian inflation, rather than the eurozone rates used by its other inflation-linked paper.
Italy took just two days to reach the total, after which it used its option to shut down the order process two days ahead of schedule.
The deal followed an €18bn sale of a similar instrument in October and the issuer is now taking steps to make sure that the next BTP Italia — scheduled for the autumn — does not similarly balloon.
“We are not going to dramatically change the philosophy of these deals, but we may look to more aggressively exploit early closing,” says Cannata.
“We may close after one day, or one day and a half. We could also place caps on single orders. That would break up big orders from institutions while still leaving room for retail investors.”
Further changes could come in 2014, as the issuer looks into technological solutions to keeping sizes down — but not keeping retail investors out. This is a work in progress, however.
“There is a big IT issue — these deals have more orders and volume than any other trades done by the system,” says Cannata.
Seven year fixed?
Next year could also see Italy print a fixed rate benchmark in the seven year part of the curve for the first time in the euro era, a tactic that some other sovereign, supranational and agency issuers have adopted over the past two years.
“We are monitoring this and it could influence our policy, but we need to verify if the trend is going to persist before we decide to go ahead,” says Cannata.
Some bankers had called on Italy to print in dollars this year, after Spain placed its first dollar deal since September 2009 in February.
But a trade is unlikely this year.
“The time for us to print in dollars was January, but we were in the process of renewing our Securities and Exchange Commission registration, which took longer than in the past,” says Cannata.
“We need to redefine our policy on non-euro deals before we go ahead. The euro/dollar cross-currency basis swap can be very volatile and we have to ensure we don’t end up paying more for a dollar deal than we would in our own currency. Also, many US investors now prefer to purchase directly in euros.”
In the meantime, on top of its auction plans, Italy remains open to private placements — a tactic that let it raise €500m of 50 year cash in May.
“Private placements help our objectives, although only a small number of the many requests we receive are accepted,” says Cannata.
“We try to only satisfy demand that won’t subtract from benchmark deals. There wouldn’t be critical mass for a 50 year benchmark this year, so that’s why the private placement earlier this year worked well for us.”