Italy’s net funding needs will drop by 20 billion euros ($26 billion) next year and the Treasury is considering a new 30-year benchmark bond should demand continue to improve, debt agency head Maria Cannata said.
The Treasury also faces 40 billion euros less in bond maturities in 2013, when more than 115 billion euros of debt comes due, Cannata said in an interview in Rome yesterday.
“Next year will surely be a less stressful year than this year as the maturities are much better distributed through the year,” she said.
Investor concern about Italy’s ability to manage the euro- region’s second-biggest debt, currently worth 1.9 trillion euros, pushed the country’s 10-year bond yields to more than 7 percent last year. Pledges by the European Union and European Central Bank President Mario Draghi to buy bonds of distressed nations such as Italy have helped bring down borrowing costs to levels that Cannata called sustainable.
“The Draghi effect is going to last for some more time,” she said. “Then we will have to see how the situation will evolve at the European level, but for the moment, I don’t see big movements on the horizon.”
The yield on Italy’s 10-year bond was little changed at 5.11 percent at 11:25 a.m. in Rome, leaving the difference with comparable-maturity German bunds at 362.3 basis points.
Cannata said that the November levels, when the 10-year yield topped 7 percent and the country’s yield curve flattened, was a “danger zone” for debt sustainability.
The relative calm in bond markets in recent weeks is helping attract investors back to Italian debt and may allow the Treasury to sell more longer-term securities to increase the average life of its debt.
“As soon as we see the opportunity to extend the average life of our debt, we will look to extend; it’s important to rebuild that relief valve,” Cannata said. “To really lengthen it we need to launch a new 15-year benchmark even a 30-year, why not, as long as we can verify that the demand is strong enough to justify it,” she said.
The Treasury sold a 15-year bond in September, the first at that maturity this year. Cannata said she expects the average life of debt to reach 6.7 years at year end.
Italy has met 80 percent of its financing needs for the year as of the end of September, Cannata said. Italian borrowing costs rose at an auction of three-months and one-year bills today while demand increased from the previous month. The Treasury sold 8 billion euros of 364-day bills at 1.941 percent, up from 1.692 percent at the last auction on Sept. 12. It also sold 3 billion euros of 91-day bills to yield 0.765 percent, up from 0.7 percent last month. Italy returns to the market tomorrow with the sale of longer-maturity debt.
There are signs foreign investors are returning to Italy, Cannata said. “Until the end of August we have seen lots of demand for two- and three-year bonds,” she said. “Then during the month of September, already by mid-September very quickly the demand spread to longer maturities, even as long as 15- year,” she said.
“With the assurances of the strong presence of the ECB many of the fears that had been created have dissipated and at this point those who stayed in bunds or other AAA-securities that barely produce returns are looking for opportunities.”
Italian 10-year bond yields have dropped more than 120 basis points since Draghi first signaled on Aug. 2 that the central bank was willing to buy bonds of euro-region countries to bring down borrowing costs. Draghi’s new bond-buying program will work in tandem with debt-purchases by the EU’s bailout funds and impose conditions on any government making a request.
Italian Prime Minister Mario Monti, who championed the idea of the rescue funds buying bonds, has shied away from a request, partly on concern about just what will be demanded in return for the support.
The ECB has pledged to buy debt with maturities of as much as three years. That doesn’t mean that the treasury will try to favor securities with that maturity in their issuance plans, Cannata said.
“I think that would be a bit myopic,” she said. “We did increase issuances of those types of maturities this year, but that was because of the weight of the redemptions we have to cover.”
The Treasury is also trying to convince Italian retail investors to buy more government debt and is selling its third so-called BTP Italia bond this month.
Cannata expects the offer to be “more welcomed” than the one in June, when “many factors,” including a tax deadline and an earthquake that struck in the Emilia-Romagna region, limited demand. The Treasury sold 1.7 billion euros of the bonds in June, with the first offer in March attracting 7.3 billion euros in bids.
The Treasury may issue only two of the retail bonds next year, and may consider different maturities, Cannata said.
“The four-year was perfect for this year, but we have to see how this will combine with the maturities that we have next year. We are thinking about changing it,” Cannata said. “I think we’ll reduce the frequency because two issuances a year will be sufficient.”
The retail bond, which investors can order through their banks or at the post office between Oct. 15 and Oct. 18, guarantees a minimum real return and pay coupons on a semi- annual basis. The nominal amount is guaranteed at maturity even in the case of deflation and investors who hold the bonds to maturity will receive a bonus payment.