In tomorrow’s auction, the Italian Treasury will offer EUR3.00-3.50bn of its 3Y benchmark, EUR2.00-2.50bn and EUR1.25-1.50bn of two off-the-run bonds in the 7Y area, as well as EUR1.00-1.50bn of an off-the-run bond in the 13Y area. Assuming the maximum allocation is reached in tomorrow’s auction, this would take Italy’s issuance to EUR129.1bn, equivalent to c.37.5% of its total funding needs in FY25 (our estimate for the year is EUR344bn).
Tactical ideas for auctioned bonds:
- Since the beginning of March, the 7Y has underperformed the flies 5Y-10Y by c.4bp. In our view, the main driver of this was market anticipation of a possible syndication on the new 7Y benchmark, and we now see limited room for a further cheapening of the 7Y area. Therefore, we expect a rebound, particularly as we approach the end-April auction when we expect the new 10Y benchmark will be launched.
- If the rebound (in credit terms) this morning due to the announcement of the pause in the introduction of US tariffs continues, we could expect the Italian 15Y to recover the recent cheapening observed vs. the flies 10Y-20Y. In that sense, we might suggest looking at BTP-Bund spread tightening positioning, but partially hedged with risk-off positioning (e.g., German 2Y).
- We also note that tomorrow’s auction will offer a greenshoe option with higher implicit value than on past occasions because it will expire on Monday (thus with two days when the market is closed but exposed to further announcements on tariffs).