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The amount of debt Italy sold directly to its citizens dropped sharply this week in a sign that the government may not be able to rely so heavily on households to meet its borrowing needs in the future.
Italians bought €11.3bn of so-called BTP Valore bonds in a five-day sale which closed on Friday, much lower than the previous three offerings which raised €18.2bn, €17.2bn and €18.3bn respectively.
Analysts warned that the result meant that Italy may have to rely more on demand from institutional investors to meet its funding needs, especially after the government extended a large tax relief scheme for private investment.
Retail demand has been a key source of funding for Italy’s looming debt pile, with around €75bn sold directly to households since the start of last year.
“After the very strong demand for Italian government bonds that we have seen in recent months, this could be a first sign that the retail market is becoming somewhat saturated,” said Christian Kopf, head of fixed income at Union Investment.
Italian households’ total sovereign bond holdings have risen sharply from €150bn at the end of 2021 to €335bn as of late February, Bank of Italy data shows, now accounting for just under 6 per cent of Italian household savings.
Barclays expects Italy’s total bond issuance will be €360bn this year, up from €340bn last year, with sales net of redeeming bonds at €93bn, up from €87bn in 2023.
The BTP Valore tranche offered a tax incentive and bonus if held to maturity. But the slowing demand meant Italy would probably have to issue more than planned to the wider market, said Mohit Kumar, chief European economist at Jefferies.
He added that lower demand could also slow the rally in Italian government bonds, which have delivered 5.4 per cent in total returns compared with 0.2 per cent for German government bonds over the past year, according to ICE Bank of America indices.
The strong performance has narrowed the spread on benchmark Italian debt over Germany’s from 1.9 percentage points to 1.3 percentage points, as investors have become increasingly optimistic about the prospects for Italy’s economy and as the European Central Bank comes closer to cutting interest rates.
In a sign that other investors also think the spread will struggle to tighten further, hedge funds have been piling up bets against Italian bonds in recent weeks. The total value of Italy’s bonds borrowed by investors to wager on a fall in prices rose to €50.7bn this week, up from €38bn at the start of the year.
An Italian finance ministry spokesperson expressed satisfaction with this week’s BTP Valore offering, saying officials never expected to match the take-up of the three previous issues.
“We are very happy, this was our goal” the person said. “We never thought that this BTP could have the same result as the last one.”
The issue came just 10 weeks after the Italian government’s previous retail bond, but the spokesperson said the ministry had issued one now to give investors a chance to scoop up higher yields before the ECB starts cutting rates, which is widely expected in June.
Analysts at Barclays said that “for now” they don’t think the lower take up will impact Italy’s BTP issuance plans too much because the ministry provided a €20bn range for its funding plan which gives “some wriggle room”.
The Bank of Italy’s latest twice yearly financial stability report painted a mostly favourable financial picture, with the caveat that “a persistently high debt-to-GDP ratio remains a risk factor,” confirming how important retail demand is for Italy’s debt.
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