Italy sells €7.5bn in new debt at lowest borrowing cost on record
Rome looks to seize on vigorous rally in bond market in recent weeks
Italy sold €7.5bn of new debt at record-low borrowing costs as the country’s new government capitalised on a powerful bond rally in recent weeks.
The sale of new five-year and 10-year bonds comes three weeks after the centre left Democratic party and the populist Five Star movement ended weeks of political uncertainty by agreeing to form a new coalition. Investors responded by piling into Italian debt, pushing yields to all-time lows.
Rome locked in those lower funding costs on Friday, selling five-year debt at a yield of 0.26 per cent and 10-year debt at 0.88 per cent. Both auctions attracted solid demand from investors, who are navigating markets where more than two-thirds of eurozone government bonds trade at negative yields. The majority of those yielding more than zero are Italian.
“In a world where interest rates are going to remain very low for a very long time, we would expect yields to fall further,” said Mark Dowding, chief investment officer at BlueBay Asset Management, which favours Italian debt in its portfolios.
Mr Dowding said the recent decline in yields — which has gained added impetus from the recent resumption of bond-buying stimulus by the European Central Bank — has created a virtuous circle for Italian debt. As yields fall, Rome’s massive debt pile of more than 130 per cent of GDP looks more sustainable, drawing in further buyers.
The new government replaced an unstable coalition between Five Star and the rightwing populist League party, which unnerved investors over the past 18 months with its anti-EU rhetoric. Markets were also uneasy about the prospect of new elections, which would have likely strengthened the position of League leader Matteo Salvini.
“The political changes have forced a lot of the bears to capitulate,” Mr Dowding said. “They were working on the assumption that Salvini would start another massive confrontation between Rome and Brussels and questions about Italy’s place in the single currency would re-emerge. That’s not how things have played out.”