Italian Debt Offers 0% Interest for First Time

(Bloomberg) — Investors buying Italy’s latest debt sale will get no payment for the first time ever, as the country capitalizes on its record-low borrowing costs.

The country’s Treasury will sell new benchmark three-year debt with a 0% coupon at auction on Tuesday. That will make it a test of just how strong the region’s bond demand is, given investors are no longer able to grab high yields for securities long considered among Europe’s riskiest.

Italy’s three-year rate in the secondary market has already turned negative, falling Tuesday to a record low of minus 0.25%. That is a far cry from the almost 2.5% level reached in March amid the coronavirus lockdowns, as investors have since piled into the nation’s debt.

The yield on the nation’s seven and 30-year securities also fell to an all-time low.

chart: Italy’s Treasury seeks to lock in record-low yields at debt sales

© Bloomberg
Italy’s Treasury seeks to lock in record-low yields at debt sales

Driving the rally in so-called BTP debt is a combination of a government looking more stable after recent regional elections, and the European Central Bank’s supportive asset purchases. The European Union’s recovery fund plans also make the outlook safer, with the yield premium over Germany — a risk gauge — at the lowest since May 2018.


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“Momentum for BTPs is positive and we expect the supply/liquidity outlook into year-end to be favorable,” said Chiara Cremonesi, a rates strategist at UniCredit SpA, in a note. She cautioned however that any further rally could be limited given the outright yield and spread levels already look quite stretched.

Support at Tuesday’s auction will come from the reinvestment of a 15 billion euro ($17.7 billion) three-year bond that is maturing, Cremonesi said. The Treasury is also selling seven-year and 30-year bonds, to raise up to 7.5 billion euros, with the auction bidding deadline at 10:00 a.m. London time.

The risk-reward favors buying the 30-year tenor and selling 10-year debt against swaps, in a bet on a flatter yield curve, according to Barclays Plc. While there is risk of a downgrade when S&P Global Ratings reviews the nation’s BBB rating on Oct. 23, Barclays strategists including Cagdas Aksu see the supportive market factors as potentially keeping it steady.

(Updates prices and chart from third paragraph.)

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