Italian Sovereign

A debut sovereign green bond from Ireland and benchmark from a Spanish agency provided the firmest proof yet that the fiscal stink over Italy’s planned budget deficit has not put investors off other SSAs in the eurozone — even those that until recently were in the same ‘periphery’ bucket as Italy. But bankers are concerned that Italy’s standoff with the European Union has further to run — and that a BTP spread over Bunds of 400bp will be the breaking point.

The Italian government’s economic growth expectations are likely to take a hit from “unintended tightening” of monetary policy if BTP yields keep rising, investors have warned.

A fresh Italian government bond market sell-off on Monday is unlikely to impact issuance from public sector borrowers during the rest of the week, according to SSA bankers.

Italian government bonds suffered another up and down week as investors first baulked at government plans for the budget deficit to be 2.4% of GDP in each of the next three years — then snapped up paper amid suggestions that the deficit would fall gradually. In any case, many on the buy-side are wary of any policy announcements that come from the government.

Italian government bonds enjoyed a strong start to Wednesday morning as investors digested talk that the country’s budget plans could be less spending heavy than previously thought. But the buy-side was sceptical that Italy’s populist government will stick to the plans — and BTPs had already retraced some of their earlier gains by the late morning.

Italy’s latest political drama is making investors nervous, and rightly so — when the leader of a country’s main governing party accuses European leaders of market ‘terrorism’, in the vein of an ‘EU equals the USSR’ conspiracy theorist, then you’d be right to dump its bonds. But the steadiness of Spanish and Portuguese govvies through all this shows not only that the term ‘eurozone periphery’ may have to be consigned to the historical dustbin, but that the firewalls erected by those same European leaders after the last sovereign debt crisis are standing firm.

The Italian cabinet has agreed upon a budget deficit target of 2.4% of GDP for the next three years, rejecting the finance minister’s 1.6% target proposal, causing Italian assets to sell off.

Negotiations over Italy’s 2019 budget deficit looked set to go down to the wire as GlobalCapital went to press on Thursday night, with the outcome likely to have a large bearing on the sovereign’s future issuance costs.

Italian government bond yields jumped around as jittery investors digested another day of conflicting messages from the country’s government, ahead of an expected announcement on the 2019 budget later on Thursday. But even if the deficit plans meet investors’ hopes, there may not be a large BTP rally, said SSA bankers.

Koos Timmermans, the outgoing chief financial officer of Dutch bank ING, will be stepping down from his role as the chairman of the working group on euro risk-free rates, according to a European Central Bank (ECB) spokesperson.

Rating: Baa2/BBB/BBB

Signs emerged in the SSA market this week that not all SRI bonds are equally worthwhile as far as investors are concerned, particularly when market conditions are not ideal. A series of bonds with a green label went through with little difficulty but a pair of social bonds were undersubscribed. Craig McGlashan reports.