Italy Immitates US, Tries To Lower Spreads By Increasing Bond Issuance, Fails

The idiocy in Europe knows no bounds. Just as the EURUSD was about to stabilize a little, and we use the term very loosely, Italy comes out and announces that due to its Robin Hoodesque task of rescuing Greece, and the need to shore up even more liquidity, that it would increase its bond issuance to €240-250 billion. As Market News reports: "Italy’s contribution to the EU’s Greece aid package is E14.736 billion out of a total E110 billion package from the EU and IMF, under the three-year economic and financial policy program. This year’s contribution is estimated to be around E5.4 billion. The first tranche of this loan E2.921 billion was paid in early May." Alas, unlike in the US where every new trillion in bond issuance somehow results in a 50 bps tightening in the 10 year, Italy is not quite so lucky. The result of this announcement: new all time high for Italy 10 year Bund spreads at 173 bps. And it doesn't end there: Reuters has just reported that talks between Sarkozy and Merkel, previously scheduled for today, have been rescheduled for June 14 (and probably cancelled as the two European leaders can't stand each other any longer) - is it all now falling apart in Europe behind the rosy rhetoric?

Back to the Italy new spike in issuance, where the biggest threat, just like in the US, are the billions in upcoming redemptions.

Italy has around E120.85 billion worth of redemptions in BTP/CCT/CTZ bonds this year to refinance and around E104.22 billion in T-Bills by year-end, whilst coupon payments are estimated to be E23.625 billion, according to MNI calculations.

Redemption payments are due to remain elevated in coming years, and estimated to be E191.0 billion in 2011, and E171.0 billion in 2012.

Cannata also confirmed that the debt agency has so far sold E102.735 billion this year in medium-long dated BTP issues, 2-year zero coupon CTZ bond, 7-year CCT and index-linked bonds.
The Italian Treasury is looking to sell a new 5-year 3.00% June 2015 BTP issue on Thursday as the current existing 5-year benchmark issue — the 3.00% Apr 2015 BTP issue already has a E20.032 billion current size outstanding. The Treasury is also due to tap the 4.00% Feb 2017 BTP along with the 4.00% Feb 2037 BTP issue. The size’s of these issues is expected to be announced on Tuesday, but most strategists expect around E8.0 billion issuance this week.

Italy normally sells 5-year, 15-year and 30-year BTPs at its mid-month auctions, depending on demand and market conditions and 3-year and 10-year BTP issues, 7-year CCT issue and index-linked BTPei issues at its end-of-month auctions.

In terms of new bonds to be sold this year, Cannata said, “We issue 15-year and 30-year BTPs, although sometimes, following advice from our economists we can reopen old ‘off-the-run’ bonds”.

Italy has so far sold a new 3-year BTP on March 20 for E4.0 billion, a new 10-year 4.00% 2020 BTP for E5.0 billion on March 30 and a new 2021 BTPei issue — linked to the EU Consumer Price Index excluding Tobacco for E3.0 billion on April 21.

We will keep a close eye on the BTC ratios in these upcoming Italian auctions: we have a feeling the recent spate of failed auctions in Germany, Hungary and Romania will have quite a solid runway as we enter June. Should Italian Bund spreads continue probing new all time records, we won't have long to wait.