Italy plans to offer EUR3.5bn-EUR4.0bn of its 5Y, EUR3.0bn-EUR3.5bn of its 10Y and EUR1.0-1.5bn of its CCTeu 5Y at tomorrow’s auction. Considering the exchange operation executed on 20 January (which is essentially a pre-funding operation), if the maximum allocation is achieved it would take Italy’s issuance to c.10.1% of its total funding needs for FY2023 (EUR315bn). We note that the cut-off time for this auction is aligned with the publication of the preliminary read of Italian 4Q22 GDP, for which market consensus stands at -0.2% but, in our opinion, with a risk of being surprised by better data due to: i) the warmer autumn/winter; ii) the positive dynamic of gas and energy prices; iii) some investments made by the government related to the NGEU plan (slightly delayed with respect the initial RRF timeline); iv) the support for the economy provided by the new government in October/November using the 0.5% (of GDP) fiscal room left by the Draghi government.
BTP 3.40% April 2028. This will be the second auction of this reference after the Italian Treasury launched this new benchmark in an exchange operation at the end of November with a total of EUR5bn. From a general perspective, the 5Y tenors of all the sovereign curves look quite rich in historical terms, with a tightening both vs. shorter tenors and the fly 3Y and 7Y of c30bp in the last quarter. However, the Italian 5Y does not look as rich when compared on a RV basis with respect to the slope of the curve of other sovereigns and core rates. Of particular note, the figure below shows that the BOX IT-GER 2Y-5Y and IT-€swap 2Y-5Y is near the maximum level seen over the last three years, suggesting there is non-negligible value in the belly of the Italian curve. Specifically in terms of the reference, we note that it offers an on-the-run premium of almost 7bp (interpolating the bonds of similar maturity and duration), the highest level since mid-December. The quite sizable amount offered, which might put some pressure on the ramp-up of the auction tomorrow morning, should widely offset the slight signs of specialness in the repo market (last SN repo rate at 1.89% vs. GC SN at 1.98%) and in any event should help to avoid any relevant overbidding, thus making the auction a good entry level for this bond.
BTP 4.40% May 2033. This will be the third auction of this reference with a current outstanding amount of EUR6.75bn. From a general perspective, after tightening c.35bp over the last month, the 10Y BTP may now seem quite expensive vs. other sovereigns (the BTP-Bund spread is now at c.186bp, 10bp higher than the minimum reached over the past week). However, it is worth mentioning that the performance of the BTP-Bund spread from the peak observed in mid-October does not signal an overperformance with respect to other credit risk indexes: the BTP-Bund spread has tightened c.22% from the peak, the Italian CDS 5Y c.33%, the Itraxx XOVER by almost 40%. In this sense, we cannot ignore the possibility of additional performance of BTP 10Y if the central bank meetings and the other relevant market movers in the next few weeks trigger a bullish leg up in the market. Specifically to the reference, we note that the on-the-run premium has been partially absorbed in recent weeks, and is now equal to c.3-4bp (from 7-8bp in December). In our view, this healthy performance is partly due to the fact the bond has become the cheapest-to-deliver bond among BTP futures (both for the March and June contracts), and thus offers better liquidity conditions for final investors and the possibility of seeing some spikes in the future in terms of specialness in the repo market during the expiry dates of the futures contracts.
CCTeu April 2026. This auction will be the ninth of this reference, with a total outstanding amount that could reach EUR15.5bn after this tap (if the reopenings reserved for the specialists are also sold). As we mentioned in our last CCT auction preview, the Italian Treasury offered the CCTeu April 2026 in October, which was well bid at that auction, with the highest BTC ratio of the last two years (2.16x) and a positive price discovery process with an overbidding of 3-4 ticks price, confirming the growing interest in the mid-term tenors of CCTeu. Generally speaking, the CCTs are now offering a slightly higher pick-up vs. BTP with respect to November (when the last CCT auction was held). Across the curve, CCTeu April 2029 remains quite rich vs. 2026 and 2030. The on-the-run premium offered by the CCTeu April 2026 is not very relevant, probably because the market is already expecting a new benchmark CCT 5Y, which might arrive in the next 2-3 months (as we mentioned in our European sovereign debt issuance outlook here). In the repo market, the bond does not signal any specific value (last S/N repo rate at 1.95%). However, we are cautious about excluding non-negligible overbidding at the auction, given the fact the demand for floating rate bonds may be sufficiently large in the next few weeks, being close to the central bank meetings and due to market concern about the next monetary policy decisions.