Italy plans to offer EUR3.5bn-EUR4.0bn of its new 3Y reference (April 2026), EUR2.5bn-EUR3.0bn of its 7Y, EUR0.50-0.75bn of its 50Y and EUR1.5-2.0bn of its BTP Green benchmark (Apr 2035) at tomorrow’s auction. If the maximum allocation is achieved it would take Italy’s issuance to c.26.7% of its total funding needs for FY2023 (EUR315bn). The issuance of BTP Italia last week reached almost EUR10bn in terms of the amount sold, with a very important participation of both retail investors (EUR8.5bn) and domestic institutional investors in the second phase of the placement (85% of the EUR1.35bn sold in this phase was dedicated to institutional investors).
- BTP 3.80% April 2026: as expected, the Italian Treasury is going to offer the new benchmark BTP April 2026 for the 3Y tenor. The bond is offered for a total amount of EUR4bn and given the strong re-pricing in rates since last Thursday the bond is now trading well above par. In this risk-off mood, all the curves are steepening quite significantly, with a re-pricing in the short maturities mainly due to speculation on a more conservative approach by central banks due to concerns about financial stability. However, we note that the current market yields on the medium tenors is still above the January levels, indicating that at this stage the market has just set aside the very aggressive scenario in terms of the ECB’s hiking decisions over the medium term (i.e., from the excess of a terminal rate in Eurozone above 4% to the current 3.5%). Looking at the Italian 3Y, we note that it has performed well in RV vs. 1Y and 5Y, but if one compares the butterfly 1Y-3Y-5Y vs. Spain, the 3Y has underperformed by c.20bp over the last month. Specifically to the reference, the roll vs. the previous benchmark is now trading in the +9bp area, with the on-the-run premium that we approximately quantify at 8bp, very high for a 3Y reference, and which for Italian bonds we saw in a context of significant weakness (e.g., last September and October).
- BTP 3.85% December 2029: this will be the fifth auction of this reference that might reach an outstanding amount of almost EUR19bn after this auction, indicating that this will probably be the last supply of this reference. In this sense we expect a new benchmark by next month that the Treasury might decide to offer in the mid-April auction (base case) or through a syndication in the event that SVB is a real game changer for central banks and financial markets, triggering a completely new scenario for investors on fixed income products with a more conviction in Italian bonds (we are referring to foreign investors). Looking at the Italian 7Y area, even if this has recently experienced a tightening vs. 5Y, it still looks quite cheap if one looks at the box IT-SP 5Y-7Y: the credit pick-up of the Italian 7Y vs. 5Y remains close to the maximum level seen since September. About this reference, we note that the on-the-run premium is now close to 10bp, well below the average level YtD but still high in absolute terms: as mentioned above the upcoming auction will probably be the last chance to buy this bond with a significant on-the-run premium determining its relatively cheap valuation (i.e., the previous 7Y reference BTP June 2029 has significantly tightened c.8bp vs. surrounding bonds in the last four months after it became an off-the-run bond). The repo market is not indicating any specific tensions and relevant shortage of the bond (last Friday, avg. t/n 2.477% vs. GC s/n 2.486%) and for this reason there is a limited risk of any significant overpricing in the execution of this auction.
- BTP 4.00% April 2035: this auction will be the second of this reference after the Treasury launched it in September through a syndicated issuance (EUR6bn) and re-tapped it for EUR2bn in November. In the current volatile context, the Italian 10Y has recently suffered vs. core paper with the spread 10Y BTP-Bund now close to 190bp, although still slightly below the previous peaks observed in January and February in the range 190-200bp. Even if we believe that if the current risk-off mood continues to affect market behaviour it would likely push peripherals spreads slightly wider in the short term, we note that the fundamentals should be supportive for Italian paper as: i) from a flow perspective, in 1Q23 the Italian Treasury will have covered almost the 90% of the net issuance for FY23; ii) if central banks are going to modify their market approach due to financial stability risks, it would be an even more benign scenario for peripherals. In this context, since there are some risks for a surge in the scarcity effect on the high-quality bonds (namely, the German ones) we suggest not looking at the BTP-Bund spread as a good trading reference for Italian bonds. Referring to the reference, we note that the bond has seen a notably cheapening in recent weeks: the so-called greenium has disappeared (whereas on the BTP April 2045 this is still present and we quantify it at c.10bp) and the bond is now offering c.2bp of pick-up vs. the interpolated levels of brown bonds with similar maturities. However, we note that it is partly due to the different reference levels in the repo market: in fact, several securities in the 10Y-15Y area are signalling some shortage in the repo market and the BTP April 2035 is the one with the lowest level of scarcity (last Friday, avg. t/n 2.355% vs. BTP March 2034 t/n 2.283% or vs. BTP August 2034 t/n 2.257%). Whatever the outcome, the amount offered of EUR2bn should be sufficiently high to avoid any relevant overpricing risk in the execution of the auction.
- BTP 2.15% March 2072: this auction will be the first of this reference, after the Treasury launched it in April 2021 for an amount of EUR5bn. From the Treasury perspective, even if the amount offered is not so high (EUR0.50-0.75bn), it would contribute to maintaining a high average life of the outstanding debt, with an effect equivalent to an auction in which up to EUR1.25bn of a 30Y is offered. Moreover, the inversion of the curve in the 15Y-50Y area makes it more interesting in terms of funding cost for the Treasury to offer longer tenor bonds. From the investors’ perspective, we note that at these market levels, the Italian 50Y (4.10%) would well remunerate the ECB target inflation level over the medium term (2%) and a term premium higher than 2%. Moreover, we note that the box IT-SP 10Y-50Y has recently widened and it is now at the maximum level seen over the last nine months. Lastly, this bond will likely fit the tactical interest of some specific investors interested in bonds with very low cash price and a relevant component of convexity. The level of relevant specialness signalled in the repo market (last Friday, average t/n at 1.76%) hints that the inflows in this bond have already taken place and the auction may mainly be covered by primary dealers’ short-covering.