Tomorrow's auction will see the Italian Treasury offer EUR4.50-5.00bn of the new 5Y benchmark, EUR2.50-3.00bn of the 10Y benchmark, as well as two CCTs-eu (3Y and 7Y) each for an amount of EUR0.50-0.75bn. Assuming the maximum allocation is achieved, this would take Italy’s issuance to EUR283bn, or c.88.4% of its total funding needs for FY2023 (EUR320bn), ahead of the publication of the 4Q23 Issuance Programme today or tomorrow that, according to the new fiscal projections in the NADEF, will provide the final figure for the FY23 funding target.
Tactical ideas for auctioned bonds
- Ahead of the NADEF projections, we suggest considering to be tactically constructive on the 5Y-10Y area of the BTP curve if: i) a moderate upward revision of fiscal projections will be approved (namely, the “net cash borrowing requirement for the State Sector” revised up by not more than 0.7% cumulative for 2023-2024 and next year’s deficit ≤4%); ii) considering the relief that the incoming retail-BTP Valore (next week) may offer in terms of supply.
- We also see value in the short-end CCTs-eu in order to take advantage of the repricing of the higher-for-longer scenario in rates.
Background on the references up for auction
- BTP 4.10% February 2029. The Italian 5Y area has underperformed in RV shorter tenors with c.7bp of steepening vs. the 2Y area of the Italian credit curve. Looking at the bond performance in the grey market, the roll vs. the previous benchmark is now at c.7.5bp and our estimate of the new issue premium stands at c.2.5bp. However, the main value of the auctioned bond comes from the recent concession in the 5Y area.
- BTP 4.20% March 2034. The Italian 10Y area has suffered the most since the last auction , with an increase in yield of c.47bp in absolute value and c.22bp vs. Germany. Last week’s Italian weakness cannot be explained simply by the higher market Beta with rising European real yield, as some idiosyncratic factors have also played a part in the recent performance. The positive factor is that tomorrow’s auction will be held after the publication of the NADEF, which should effectively rule out all the elements of uncertainty that might affect investor appetite. Regarding recent bond performance, this has not signalled any specific underperformance with the roll vs. the previous benchmark stable in the +5bp area.
- CCTeu April 2026 & CCTeu October 2030. The CCTs-eu has recently offered a good investment opportunity in a context in which yields were repricing the higher-for-longer scenario after the recent round of central bank meetings. Regarding the CCTeu April 2026, it is offering +21bp of pick-up vs. the BTP curve (DM vs. Z-spread) slightly below the level of CCTs-eu maturing in 2025, and looking at recent market performance is not signalling any specific pre-auction concession. Regarding the longer CCTeu October 2030, the pick-up vs. the BTP curve is c.25bp, slightly lower than the one offered by CCTeu October 2031, and recent performance has been stable without any specific underperformance.