Italy Beats Peers With Cheapest Debt Since August: Euro Credit

Italy Beats Peers With Cheapest Debt Since August
Italy plans tomorrow to sell 9 billion euros of six-month bills, which represents more than a third of the bills to be sold this week in the euro region by France, Spain and Germany. Photographer: Victor Sokolowicz/Bloomberg

Italy may have an easier time selling bonds than its peers this week as optimism about the nation’s budget restraint drives borrowing costs to the lowest level since August.

The Treasury will auction about 11 billion euros ($15.3 billion) of bonds, split between a zero-coupon sale tomorrow, inflation-linked debt on Oct. 27 and two bonds repayable in 2013 and 2021 the next day. The total amount represents more than half the bonds on sale in Europe this week.

The yield premium investors demand to hold Italy’s 10-year debt over similar German bunds narrowed 25 basis points this month to a low of 133.4, the least since Aug. 11. That’s the lowest among Europe’s so-called peripherals, including Greece, Portugal and Spain, as investors reward Italy for doing a better job at controlling the budget deficit.

“There’re no fundamental issues to be worried about with Italy in the near term,” said Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London. “It might have a high level of debt, but its fiscal position is better than other peripheral countries. Its debt maturity profile is benign and the economic performance has improved.”

Greece’s near default in April led to a surge in borrowing costs among the region’s high-deficit nations that prompted governments across Europe to impose austerity measures. Italy’s deficit of 5.3 percent of gross domestic product last year was less than half that of Greece and Spain. The government was able to avoid the most painful budget measures, including the wage cuts and tax increases adopted by others, and also maintain the lowest deficit projections for next year of the four countries.

Three-Year Offering

Demand at the bond auctions will be underpinned this week by more than 30 billion euros of redemptions and coupon payments that will leave banks with funds to reinvest. Italy also may attract investors with a new three-year bond.

“The amount of Italian debt to be sold this week is above average,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “Having said that, a big chunk will come from a new three-year benchmark, which is the area where demand is strong.”

Domestic buying may help prevent the flood of paper from weighing on Italian bond prices in the secondary markets. At a sale of bonds due 2017 on Oct. 20, Italian investors bought 76 percent of the debt. In Portugal, only about 17 percent of debt was held locally, the government’s debt agency said in April.

Italy plans tomorrow to sell 9 billion euros of six-month bills, which represents more than a third of the bills to be sold this week in the euro region by France, Spain and Germany. The bond sales come as governments seek to pass budget plans that convince investors they will make good on pledges to trim budget deficits and cut spending, Cazzulani said.

‘Event Risks’

“The timing of the sale might work in Italy’s favor as well,” Cazzulani said. “There are event risks elsewhere in the peripheral area. We don’t know if the Portuguese budget will be accepted. There’s renewed concern about Ireland. That may help support demand for Italian paper. I don’t think the market will struggle to absorb the supply.”

Portugal, the only other peripheral to come to market this week, saw its spread with Germany widen 26 basis points between Oct. 18 and Oct. 22 after Prime Minister Jose Socrates’s government postponed the vote on its budget plan until Nov. 3 as it seeks to secure the support of the Social Democrats, the biggest opposition party.

Comparing Belgium

Belgium, with Europe’s third-biggest debt after Italy and Greece, has increasingly been compared with the peripherals amid growing political instability. The country sells three-, five-and 10-year bonds today. Its yield premium with Germany climbed 20 basis points in the past three months, the most in the euro region after Portugal, as June elections proved inconclusive, leaving the country with a caretaker government. The latest attempt to form a new administration collapsed last week.

Belgium has a higher credit rating than Italy, with its bonds ranked AA+ by Standard & Poor’s three notches above Italy’s A+, meaning the Italians probably will offer higher returns than Belgium at the auctions. Italy’s 10-year bonds yield 50 basis points more than comparable Belgian debt.

In Italy, Prime Minister Silvio Berlusconi has managed to quell divisions with a key ally in his coalition, leaving little risk to passage of a budget that aims to trim the deficit to 3.9 percent of GDP next year, about a third the shortfall forecast for Ireland and less than half estimates for Spain and Portugal.

Unlike Spain and Ireland, Italy’s economy will grow this year, growing 1 percent, the International Monetary Fund estimated on Oct. 6. Italy will expand at the same pace next year, according to the IMF.

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