Italian debt remains under pressure due to Eurogroup, supply

[LONDON] Italian bonds remained under pressure on Wednesday due to continued disappointment with the Eurogroup's coronavirus package and the announcement of changes to the country's funding programme that made the prospect of rising debt more pertinent.

Euro zone finance ministers agreed a half-a-trillion euro (S$774.92 billion) plan to support coronavirus-hit economies last week. However, to the disappointment of several states led by Italy, the deal did not mention using joint debt to finance the economic recovery.

Without joint debt issuance, coronavirus stimulus would only add to the already chunky debt pile of Southern European states, which has raised concern about debt sustainability, particularly in Italy.

"It's the same factor like yesterday, because we had no agreement by the European leaders on the coronabonds. That is why BTPs are suffering," DZ Bank rates strategist Sebastian Fellechner said.

Italy will hold larger debt auctions and may resort to more costly syndicated placements also for shorter-dated bonds as it ramps up spending to fight the coronavirus crisis, its Treasury said on Tuesday.

While the expectation of additional issuance from Italy had already been priced into markets, the announcement making that official still added pressure to Italy's debt, Mr Fellechner said, noting uncertainty around the amount of debt that would be raised.

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Italy's two-year bond yield was last up five basis points (bps) to 0.89 per cent after rising nearly 20 bps on Tuesday. 10-year yields were flat at 1.79 per cent.

The closely watched gap with Germany's 10-year bond yield, effectively the risk premium Italy pays investors, continued to rise, last at nearly 220 bps. That is the highest since mid-March, when worries about the country's debt sustainability were at their peak.

Joint debt issuance is a possible euro zone response to tackle the coronavirus emergency, Eurogroup President Mario Centeno said in an interview with Italy's Corriere della Sera daily.

Higher-rated, so-called "core" yields continued to edge lower on Wednesday, with Germany's 10-year benchmark down three basis points to -0.41 per cent.

In the primary market, Germany is scheduled to sell one billion euros of bonds due 2044 and the Netherlands will sell 2030 debt after postponing an auction on Tuesday due to technical problems. Greece is expected to sell a seven-year bond via a bank syndicate.

REUTERS