Italian Sovereign

Delve into the details of their respective economic and political prospects, and Italy’s investor credentials are seemingly more favourable than Spain’s, writes Jeremy Weltman.

Spain's spread over Italian bonds could widen further as investors fret over its finances while responding positively to the reforms led by Italy prime minister Matteo Renzi, despite Spain shrugging off a move from positive to stable outlook from Moody's late last week.

European credit markets, led by the banking sector, have seen risk escalate over the past several weeks with the Markit iTraxx Europe Main index seeing its spread widen to the highs of June 2013. One bright spot however, has been the region’s sovereign credit, which has largely steered clear of the contagion that developed in the corporate market.

A rise in eurozone periphery sovereign yields this week took its toll on Italy’s borrowing costs at an auction on Thursday, but Ireland showcased its semi-core status as its costs fell at a bond sale.

Issuance slowed in the sovereign, supranational and agency bond market this week thanks to Chinese New Year and the anticipation of US Federal Reserve chairperson, Janet Yellen's testimony to US Congress.

Portugal’s 10 year yields have risen while fellow eurozone periphery sovereigns Italy and Spain have staged a moderate rally, with bankers noting that investor fears are focused on Portugal’s political outlook.

Italy set bankers’ hearts aflutter this week with an early contender for deal of the year, breaking several records with a €9bn 30 year benchmark. But more importantly, the trade blasted open a hole at the long end that other sovereigns could pile through.

Rating: Baa2/BBB-/BBB+

Kommunalbanken (KBN) are set to price the first five year dollar bond for three weeks on Wednesday while Italy’s 30 year bond was the first SSA issuance in the tenor for 2016.

Italy has sold the largest ever 30 year bond in euros, a trade that is likely to inspire other issuers into the tenor amid what some bankers are calling a key time for the SSA market.

Italy is set to benefit from a Bank of Japan-induced rally in eurozone government bonds late last week after mandating for a 30 year benchmark on Monday — and bankers suggest Spain could follow with a similar deal.

Monte dei Paschi di Siena may be the ugly sister of Italian banks for investors, but it’s the Italian sovereign’s favourite son when it comes to primary dealerships.