Tomorrow's auction will see the Italian Treasury offer EUR3.0-3.5bn of the 5Y and EUR3.25-3.75bn of the 10Y benchmarks, as well as EUR1.0-1.25bn of an off-the-run 10Y bond and EUR1.0-1.25bn of the CCTeu 5Y. Assuming the maximum allocation is achieved, this would take Italy’s issuance to EUR239bn, or c.74.7% of its total funding needs for FY2023 (EUR320bn).
As a general comment, we note that this auction cycle arrives just before the ECB and BoJ meetings. For this reason, the implicit value of the reopening offered by the Treasury this time is notable and we expect a healthy participation from tactical investors with a high risk of overbidding.
- BTP 3.80% August 2028. This will be the third auction of this reference with a current outstanding amount of EUR9.5bn. Since the previous auction, 5Y yields have fallen by c.15bp. In terms of curve slope, the Italian curve faced a steepening in the 3Y-5Y area, both in absolute terms and in RV terms vs. other sovereign curves. In particular, we note that the box IT-SP 3Y-5Y increased by c.10bp, and is now close to the maximum level seen since March. The benchmark showed a stable performance with respect to the surrounding bonds: it is still offering a not-negligible on-the-run premium of c.4bp and the roll vs. the previous benchmark is stable at c.4bp. As for the possibility of seeing a new 5Y benchmark at the end of September, we believe the on-the-run premium may be partially absorbed in the coming weeks.
- BTP 4.35% November 2033 & BTP 2.50% December 2032. The Italian 10Y area has outperformed the other sovereign curves since the beginning of July, reaching on Monday the smallest spread level since the beginning of June vs. core and the lowest level since March 2022 vs. Spain. BTP November 2033 is still offering an on-the-run premium of 2bp, with the roll vs. BTP May 2033 at its lowest level at 6.5bp. Given that this will arguably be the last auction of this bond as a 10Y benchmark, we think it might fully reabsorb the current c.2bp of on-the-run premium. Regarding the tap of BTP December 2032, it will partially fill the structural shortage of this bond (special in the repo market, with more than cEUR1.5bn traded daily in the SN and TN tenors).
- CCTeu October 2028. This will be the fourth auction of this reference, with a current outstanding amount of EUR7.9bn. In the last month, the CCTs-eu has performed well vs. BTP in ASW, in particular during the last bearish leg at the beginning of July. Regarding the reference, in the past few days the bond has cheapened both vs. BTP in ASW (with the pick-up at c.25bp) and vs. other CCTs, suggesting a pre-auction concession of c.3bp. We think this offers a good opportunity for investors who fear a more hawkish approach (than is currently priced in the market) at the upcoming central bank meetings.