Long-dated bonds

Italy: Unfashionably Late

The country is having to pay the most since 2014 to borrow money.
Photographer: Chris Ratcliffe

Better late than never? Italy is finally arriving at the bond party that kicked off in the euro zone once French President Emmanuel Macron won his election; the question is whether the nation is paying too much for 30-year money.

France, Belgium and others have already tapped investor demand for long-dated securities. Italy is expected to offer a coupon of about 3.5 percent. At that level, however, Italy's cost of funds is near the highest its been since late 2014.

Expensive Funding

Italy has not chosen the optimal time to raise long-dated finance

Source: Bloomberg

Investors have already placed orders for more than 22 billion euros ($25 billion) of the new Italian bonds, suggesting a yield 220 basis points more than German debt is attractive.

Missing The Sweet Spot

Italy has seen its funding costs rise since the end of May

Source: Bloomberg

Italian debt has under-performed its peers since Macron's election. Portugal's 30-year debt, for example, yields just 60 basis points more, a third of the premium prevailing at the beginning of this year.

Peripheral Rivalry

The outperformance this year of Portugal versus Italy in 30 year maturities is extraordinary

Source: Bloomberg

Italy doesn't even have the market to itself this week. The European Stability Mechanism, the European Union's bailout vehicle, is tapping its existing 1.8 percent bond repayable in 2046 for 1.5 billion euros. Its higher creditworthiness, though, means it will offer investors a yield about 2 percentage points below Italy's. 

So why come for funding now -- unless there is a sense that conditions might be worse if it waits? The European Central Bank's quantitative easing bond-buying program is not going to be around forever. While ECB President Mario Draghi might avoid mentioning tapering after Thursday's monetary policy meeting, the current program is scheduled to end anyway by the end of the year. 

What is the Italian for Deja Vu?

Getting the timing wrong on ultra-long maturities can prove very expensive for investors

Source: Bloomberg

Issuing now suggests Italy's debt managers may be concerned the country will have an early election that would close the funding window. That, in turn, should be a worry for investors -- especially given Italy's most-recent long-dated issue is trading at a discount of about 20 percent to its face value.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Marcus Ashworth in London at mashworth4@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gilbert at magilbert@bloomberg.net

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