Draghi’s Italy receives record $134b orders in bond sale

by BLOOMBERG

Italy racked up more than 110 billion euros ($134 billion) of demand for its first bond sale since Mario Draghi took the reins as premier, a ringing investor endorsement for his new government.

The scale of bidding seen at the 10-year bond sale, topping the previous record of 108 billion euros set in June, looks particularly strong in light of reflationary forces eroding the appeal of debt in the region. ING Groep NV and UniCredit SpA are among those still bullish.

Italian bond yields tumbled to record lows last week on signs that former European Central Bank President Draghi would lead a government with near-unanimous support. His crisis-fighting approach at the ECB, in response to a market meltdown in the region’s most-indebted economies nearly a decade ago, has seen investors pile into Italian debt.

“The market can continue surfing the Draghi wave for a while longer,” said Antoine Bouvet, senior rates strategist at ING, which sees the spread narrowing to 75 basis points over the next six months. “The Draghi effect is helping demand here.”

The nation’s 10-year yield spread over Germany, a key gauge of risk in the nation, was steady at 91 basis points. The 10-year bonds were given price guidance of four basis points above existing debt. Investors also placed 24 billion euros of orders for 30-year inflation-linked debt.

Demand for government debt has stayed strong this year, as enormous central bank support outweighs reflationary fears creeping into the market. Draghi’s main policy objectives will be to work out how to spend recovery fund money from the European Union and navigate the country’s way through the coronavirus crisis.

UniCredit strategists are also forecasting Italy’s premium over Germany to narrow to 75 basis points, alongside a flatter yield curve. It sees investors taking advantage of lower political uncertainty and ECB support to adopt “carry trades,” which involve buying bonds to collect the coupon payments.

Draghi should see success with recovery funds and structural reforms and “this will lead to lower domestic political uncertainty in 2021,” wrote strategists led by Luca Cazzulani. Under a “Super Mario” scenario, the spread could drop to 50 basis points, which was last seen in 2008, the bank said.