Buyers Of Last Resort: As Dumping Accelerates, Here Is Who Is Stuck Buying Another €741 Billion In Italian Bonds

Tyler Durden's picture

Spoiler alert: There will be no surprise "I see dead bondholders"-type ending here. Having suggested precisely what the BTP trading dynamics look like previously, we now get official confirmation. With everyone else dumping Italian bonds in the open market, there are only two parties on the bid side: the ECB, and Italian banks. That's it. The only question is "how much" in order to determine at what point the selling onslaught will overhwhelm both insolvent Italian banks whose Risk Weighted capital will soon become too high forcing them out of the market, as well as drag down Draghi's recently expanded bond buying desk (we would say trading, but that would imply a two way market). Here is Barclays with the full breakdown: "Italy’s government bonds, representing the largest bond market in Europe, or the third largest in the world, have been particularly unstable since the beginning of July. The sheer size of the €1.6trn outstanding stock, of which around €220bn of bonds and €120bn of bills are rolled over every year, begs the questions who will be the buyers going forward. We thus update the breakdown of Italian bond holders which we presented in July (see Who Owns Italy's Government Debt? July 29, 2011), and analysed who has been selling and buying between the beginning of July (when widening started) and end of September (as of the latest available data). ECB has been the main buyer since August 8th, and held 4% of the Italian bond market as of September. Domestic holders, mainly financial institutions (banks) have gradually increased their holdings, taking domestic holding from 55% to 56% of the total market. Foreign investors, consisting of European non-Italian banks and real money investors as well as international asset managers, have been the main seller of BTPs, reducing their holdings from 45% to 39%." As said earlier - nothing at all unexpected: everyone who can get out is getting out. The only buyers are those for whom selling equates to suicide. That said, we wish Italian banks and the ECB the best of luck as they seek to purchase the €741 billion in bonds that are still to be offloaded as Merkel persists in refusing to let the ECB even considering announcing monetization intentions.

Lehman, pardon Barclays, with the full Monty:


  • We present the changes in the breakdown of Italian government bonds holders between end of June and September:
    • ECB’sSMPprogramhastaken4%of the market as of September
    • Domestic investors have been gradually increasing their holdings, by a total of 1%
    • Foreign investors have been the main sellers, reduced their holdings by 5%
  • The funding risk for Italy and all other sovereigns remains critical, as shown by recent weak sovereign auctions. The funding issue is not only limited to sovereigns, banks have also been increasing their reliance on the ECB

ECB – Biggest But Not the Only Buyer in Town

Undoubtedly, ECB’s SMP program has been the biggest buyer of Italian debt since its re-activation on August 8th. The buying has been concentrated on 2-10y nominal BTPs. While the spread tightening effect has faded away, it has effectively absorbed a substantial portion of the Italian bond market, €67bn in notional size or 4% of the total market as of end of September, based on our estimate. This includes the €12bn of increased holding by the Banca d’Italia, which has risen proportionally as the share of Banca d’Italia’s contribution towards the ECB (17.86%). The size as of November 17th was €100bn, or 6.2% of the market.

Italians Banks – Supporting Italian Government Bonds

Domestic investors, who already held 55% of the market before the July widening (including Italian funds managed abroad), have gradually increased their holdings since July up to the end of September as data suggest, to 56% or an increase of €14bn.

In particular, domestic financial institutions (mainly banks) have been the main domestic buyers, increasing their holdings by €23bn to €267bn. This has been in line with our expectation that domestic banks should be the long-term potential buyer due to the tougher regulatory environment.

Other domestic financial institutions (investment funds and insurance companies) have reduced some of their holdings, by €13bn to €247bn, which may have contributed by the index rebalancing among the benchmark investors, as we expected.
Finally, domestic retail investors’ holdings (corporate, households and private wealth management) data is delayed, with the end of July remaining the latest point, which remains stable at €214bn. We expect such holdings to stay stable if not higher, as the incentive for domestic households holding government bond is higher than for other assets due to lower capital gains taxes from January 2012 (12.5% vs 20%).

Selling Emerged from International Investors

The data for foreign investors’ holdings is also lagged; however, given the increase in holdings by domestic investors and the SMP’s purchase, it is reasonable to assume that the main sellers of Italian government bonds have emerged from international investors, by as much as €80bn – within which we estimate that non-Italian European banks and real money investors (insurance and mutual funds) have sold €40bn in total over the period. The remaining portion of the liquidation of €40bn has likely come from international asset managers who have been rebalancing their index to either reduce their exposure to Italy or have moved towards some type of AAA or GDP weighted index in the first few months of the widening.

Ongoing Sellers?

Continued selling post September, evidently prompted by SMP’s increased purchases and Italy’s rising yields since then, has more likely been due to deteriorating confidence beyond the initial index rebalancing. Foreign holders, especially non- European investors, who currently hold €271bn (17%) of Italian bonds, are likely to be on the front line of sellers going forward if the bearish outlook continues. The European banks and real money investors, who hold €344bn (21.6%), may be relatively stronger hands due to the large portion of Italian government bonds present within the European bond market (24%) as well as the regulatory regimes. However, this will depend on investors’ willingness to refinance the ongoing selling of Italian bonds by the government itself, with bond gross issuance €220bn a year and another €130bn of T-Bills.

Who Will Be the Buyers?

While it is encouraging to see that domestic investors have been stepping up their holdings, in line with our expectation, the move has been gradual. The slow path has also been overshadowed by the selling flows on the back of deteriorating confidence. Although it remains our key assumption that domestic insurance companies [ZH: got ASSGEN and ZL CDS yet?], will be the potential long-term buyer, the interim uncertainty and volatility certainly calls for a more urgent buyer.

The SMP, which has achieved some rebalancing role during the initial underperformance, has failed to backstop the Italy yield level or provide sufficient confidence for investors to retain their holdings. Nevertheless, the capacity of the SMP is not limited by any technical constraints: the ECB’s balance sheet can expand without limit while the sterilization process is ensured as long as there is ample excess liquidity in the system. The constraint only depends on the ECB’s willingness, both politically and their willingness to be exposed to sovereign credit risk.

Funding Risk for Sovereigns and Banks

The formation of the new Italian government has been welcomed by the market. However, our economists highlight the very poor growth outlook and implementation risks related to fiscal consolidation. The ongoing funding worries for a number of sovereigns and the banking system also stand as a key risk, especially going into year-end as balance sheet constraint amplifies.

This week we have had a failed Belgium 3-mth and 12-mth T- bill auction, an uncovered 2y German auction and a very weak Spanish 10yr auction – all pointing to the increasing worry over funding events for sovereigns, even for very short- dated T-bill issuance. The funding crisis is not only limited to sovereigns, but their close link, banks, are also facing increasing short-term funding difficulties and countries that have relied less on the ECB have now been catching up (Exhibit S2). Italy, Spain and France in particular in the last few months have ramped up their borrowing from the ECB as funding dries up in the market.

In addition, this week’s MRO saw a sharp rise in usage by €35.5bn, which has coincided with last week’s increase in initial margin for BTP repo positions by leading clearing houses. The increase in margin has likely had a negative impact on funding position of banks holding BTPs, especially domestic banks. We estimate banks would have to find an extra €5-16bn to fund this additional haircut for their BTP repo positions in CCPs, and this is not to mention the volatility of BTPs since then, which could have had additional impact on margin calls

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GeneMarchbanks's picture

'Although it remains our key assumption that domestic insurance companies [ZH: got ASSGEN CDS yet?], will be the potential long-term buyer, the interim uncertainty and volatility certainly calls for a more urgent buyer.'

Bye-bye Intesa & UniCredit. Poor iTalians.

cossack55's picture

Over the past several years I have been framing and Xmas gifting Zimbabwe, Weimar and Hangarian currency. Always well received with snickers or ever outright guffaws.  I would be more than happy to buy some BTPs, must be under $10/certificate tho.  I'll take 16 please. Contact me for mailing address.

Sudden Debt's picture

And i thought spain would take centerstage this week :)

Ghordius's picture

No, the banks are extending to Italy and the Netherlands.

Buck Johnson's picture

What happened is that the Italian govt. told it's banks and financial institutions to buy Italian bonds (which leads to if they started to sell it would be suicide to the economy).  Everyone's getting out because they know that Italy will go through a "controlled" default.

bigun's picture

they playing dis game called pass the hot potato

except its really a FUCKING BOMB; ECB & italian banks will be blown to smithereens; along with the rest of us innocent bystanders - well i know i wont be finding a job in 2012 when i graduate



Ahmeexnal's picture

How about a chart indicating who is buying german reichbunds?

Eally Ucked's picture

We only know who's sellling but we want to know who's buying that's really good question

High Plains Drifter's picture

i have heard it said that one in six amerikans work for the government. how many italians work for the government as a percentage of the workforce?

Ahmeexnal's picture

More many iTalians watch Internazionale vs. Juventus during worktimes in government offices?

High Plains Drifter's picture

that's what i mean. with this adjustment coming down the pike, the world in italy will be turned upside down. perhaps we should watch it and remember that this movie is coming here.

earleflorida's picture

just like the clint eastwood spaghetti westerns

Neidhammel's picture

Percentage of nogoodniks in

Dolce Vita: 2.3

Fakelaki: 25 (!)

Sieg Heil: 14

Gloomy's picture



Lawmakers Concede Budget Talks Are Close to Failure

Dick Darlington's picture

Waiting for Dick Bove report saying "the budget's fine".

earleflorida's picture

 just like it was, 'designed to fail', eh, and both party's declare vicory,... all the while obama's  backdoor-cuts for the entitlement programs that no republican could have ever accomplished, or even imagined [touching-the-3rd-rail] if they were in office -

think about it for awhile,...

when implemented in 2013[?] the automatic cuts will begin, 'but', with a 'war clause' that exempts military expeditures,... thus you have just a cut on the poor, period!

and, as far as i'm on the subject,... the bush tax cuts should be dropped across the board, with everyone paying their fair share


btw,... great post tyler

Cdad's picture

Witheveryone else dumping Italian bonds in the open market, there are only two parties on the bid side: the ECB, and Italian banks.

Wait...make that three.  You forgot Larry Fink at BlackRock.  Of course, it is hard to tell whether he is a buyer or a seller, based on the discontinuity of the firm's comments from week to week.  So either it is three, including Fink, or everyone at BLK is a euro debt day trader now.


Hulk's picture

Blackrock = the new MFG. Get the fuck out of Blackrock while you can...

GeneMarchbanks's picture

Ummmm... AUM= 3T. Good luck to all those 'nimble' Canadian pension funds.

westboundnup's picture

Does anyone believe that there will ever be no buyers.  More specifically, does anyone believe they will allow there to be no buyers?

Even on judgment day, there will be buyers of bonds.


Amish Hacker's picture

The question is, At what price? The wages of sin are not adjusted for inflation.

DeadFred's picture

IMHO everyone is greatly underestimating what the Fed will do. This selloff is mostly due to a liquidity squeeze and the Fed does have the ability to create liquidity. I think they are waiting for the crisis to get to the 'proper' level. That means bad enough to have everyone screaming for help but not so bad that Ron Paul gets elected. My questions are 1) when will that be? 2) will they be able to keep inflation at the BAD level instead of the ZIMBABWE level? When is the next FOMC meeting?

Shadowsil's picture

I just read something yesterday and am currently trying to find it again on Italians buying their own bonds..

The Italian citizens were buying their own debt..

Tao 4 the Show's picture

Italians hold much of the country's debt. Although the country is full of problems, the Italians themselves tend to have houses in the family and are conservative in other financial respects. The politicians are mostly criminals, though, and the unfortunate populace is likely to be badly robbed through all this.

New form of the Sword of Damocles. The politician kings can break the hair with any number of wrong moves, but the sword then falls on the people.

Gloomy's picture

If you don't know the name of the mark at the table, the mark is you.

bank guy in Brussels's picture

Italian banks buying Italian bonds, rather fits in with the proposal of Richard Koo of Nomura, that the national debt of EU countries should be sold primarily, and perhaps even exclusively, to persons and entities from that country.

Ghordius's picture

Well, it is much more stable this way
Less exposed to hot money

RobotTrader's picture

So what's next for AA rated Uncle Gorilla Notes?


More dumping of Europe Bonds + Supercommittee Failure = U.S. Treasuries exploding to new highs on Monday?

Would not surprise me.

Nate H's picture

supercommittee didnt fail. they just didnt agree - now across the board cuts - bullish for us bonds as we are recession bound for certain (plus euro situation is bullish USD and UST)

earleflorida's picture

not so fast - "I Want it Now!" - ref:     [problems :-( ]  

or___      [follow redirect]                                      

,... so who ya gonna call?

midgetrannyporn's picture

Italian banks lever up, buy Italian bonds to infinity. Problem solved.

rufusbird's picture

Kyle Bass gets to say more in this 6 minute interview than he did in the 24 minute interview in the BBC broadcast. Effective interviewer asks questions and lets him answer. Good insight on the Euro debt.

Stumpy's picture

That video was so "understandable", even for a foreign language speaker. No hesitation. Short sentences. Clear ideas.

Joebloinvestor's picture

Get the Vatican to buy them. They deserve it.

junkyardjack's picture

Good luck getting a dollar out of their collection plate

Dismal Scientist's picture



Reality break: ZH readers are too parochial...

"There is a clear disconnect between what fund managers think / believe, and what is happening on German streets.

The real world (German voters) has, in general, not the slightest concern when it comes down to the "Euro". Nice theme on TV, but does not exist in your daily life.

"Take the city state of Berlin. The city has more debt than Argentina (over EUR 60bn). But the new SPD-CDU Berlin coalition government has just agreed to employ another 11.000 civil servants, and has come up with all sorts of welfare state goodies for voters... No sign of "austerity"... There are only 12 companies in Berlin that employ more than 500 employees... Unlike Argentina, Berlin has no underlying business model, except tourism (exactly like Greece)...

"A tiny portion of Germans try to copycat the "occupy"-movement, but these guys are organized by the usual left-wing suspects (Greenpeace, Green Party, attack movement, etc.) which do know how to exploit anti-market, anti-capitalistic sentiment in Germany (certainly prevailing for a long period of time). "Lehman" 2008 simply re-confirmed their views.

"However, one aspect of the drama has become very apparent: the politicians have successfully managed to blame the "banks" in total for all the ongoing trouble. "Bad governance" by German / European governments regarding fiscal policies is not discussed. The "banks" have caused all of these problems... No one discusses the excessive, debt-driven welfare states (organized by generations of politicians) in Europe that have reached the limits of refinancing while their respective demographics are deteriorating.

"So, while a huge part of the Germans may not like the "Euro" (see many polls), the same huge part is not at all concerned about the stability of the currency and/or places like Italy. Debt de-leveraging can take many years. Therefore the name of the game in Europe / the Eurozone is and can only be "muddling through", given the number of countries and political decision-makers involved. There is no quick fix and everybody understands this.

"Also, all lip-service apart, when push comes to shove German politicians expect the ECB to jump in and buy sovereign bonds directly. The "options" are: temporarily higher inflation (good to reduce government debt and to expropriate savers) or a defunct financial system. Politicians, Bundesbank and the ECB will of course go for the former. Buying sovereign bonds directly, truly, will only happen in the very last "second", i.e. when the "virtual" crisis has become a "real" crisis (from a German perspective, since the country is booming economically & mentally).

When pain is felt, action will happen. Not before. Good luck.


JW n FL's picture



How dare YOU! Sir!! How dare You! speak against the History being written and recorded every day!

The People are Sheep! and the Sheep must be led and fed! for they can NOT! care for themselves!

History is being presented by those would seek to help the Sheep!

This is not just another greedy exercise.. wealth grabs are for the benefit of those charged with the responsibilities of the World!

They Deserve Your Hard Earned Work! You are not smart enough to know what to do with it in the first place!

Give unto them what is surely for your own good! think not of yourself but of the well being of your children! They only wish to protect you from your ignorant selves!

You Sir are living proof that no good deed goes un-punished!

You should bow and Thank them for what you have rendered to them!


Dismal Scientist's picture

Hhmm. The sheep are being herded towards to the tax and inflation pens. They are happy and complicit, the bleating idiots. I know you understand.

magpie's picture

Slight fraying at the edges. Insurance Cos bleating about the low interest rates and then being able to tear up the contracts.  And discussion of the "Riester" subsidized pension scheme.

Manthong's picture

Geez.. the next thing you know someone is going to say everything is not wonderful in China.

topcallingtroll's picture

I suspect the pain is coming in the next few months.
Expect a slow grind down for gold until I decide to sell.

Aint selling yet.

Dismal Scientist's picture

Pain is here for those in the front line. Sheeple are going to be shorn. Again, and again, and again. When you hear taxi drivers say 'what u fink about gold', then double up. The pain has not started yet.

Bansters-in-my- feces's picture

So are you waiting for the price to drop before you sell...out.?

GeneMarchbanks's picture

'Reality break: ZH readers are too parochial...'

Kind of. Although... the majority of readership is US so maybe it reflects the recent polarization.

'When pain is felt, action will happen. Not before. Good luck.'

Define pain?

Dismal Scientist's picture

When gubbmint handout + family handout runs out. Thats just the liquidity part

As a European, the pain is still ignored. Germans hear it every day that they 'may ' have to pay for the rest of Europe. Its not felt in their wallet yet.

GeneMarchbanks's picture

So... I'm not sure how that 1920s episode in Germany has impacted the modern day economic outlook of citizens but something tells me 10-15% inflation would spook many. No?

Ghordius's picture

Some, yes. But not necessarily that much.
Their typical investment mix is different.

I agree with DS, the handout is more relevant.