* Italy expected to sell new 10-year bond
* Vote outcome nerves could hoist borrowing costs
By Emelia Sithole-Matarise
LONDON, Feb 22 Italy may have to pay a big
premium to sell bonds next week if the market gets rattled by an
indecisive election result that puts in doubt reforms needed to
spur growth and cut the country's debt.
A sale of inflation-protected bonds on Monday will be the
first test of investor demand as Italians go to the polls to
choose a new government that will have to deal with the
country's mammoth 2 trillion euros of public debt.
This will be followed up by an auction of an estimated 7
billion euros of conventional bonds on Wednesday, expected to
include a new 10-year benchmark paper. The Italian Treasury, the
sole scheduled issuer in the euro zone primary market next week,
will give details of the sales later on Friday.
Markets are widely expecting the centre-left party of Pier
Luigi Bersani to win the Feb. 24-25 vote and rule in coalition
with technocrat centrist Mario Monti, with a comeback by former
Prime Minister Silvio Berlusconi - reviled by markets - largely
This has kept Italian bond yields steady in recent weeks
after an initial sell-off in early February, with benchmark
10-year debt yields within the 4.10-4.75 percent
range that has prevailed so far this year.
Nevertheless, some analysts say the market may be
underestimating the risk that Berlusconi's centre-right
coalition and other parties might rally strongly and leave the
centre-left parties with a slim majority that could weaken their
ability to push through reforms.
"The market is not fully pricing in this bad case scenario,"
said Ioannis Sokos, a rate strategist at BNP Paribas. "If we
have a negative surprise, a hung parliament or incapacity of the
left and Monti to form a strong enough coalition, we expect a
"It is difficult to forecast borrowing costs but if the
outcome is bad the Tesoro would need to offer a big discount in
order to make the bonds attractive versus the current
benchmark," he said.
The Treasury could play it safe given the uncertainty over
the elections, and skip the launch of a new 10-year debt,
focusing instead on shorter-dated paper that falls within the
ambit of the European Central Bank's conditional bond buying
Italian 10-year bonds were last yielding 4.44 percent, 5
basis points down on the day while five-year yields were down 7
bps at 3.19 percent.
The bonds have recouped almost half of losses seen early
this month as some yield-hungry investors bought back into the
cheapened debt, betting too that the ECB's bond backstop would
prevent panic selling.
While post-election nerves may lift borrowing costs,
domestic demand backed by 6.3 billion euros in coupon payments
should ensure smooth sales, analysts said.
"Overall any sort of downside will ultimately be limited by
the fact that we still have a huge amount of liquidity-inspired
risk-on move and the OMT (the ECB's bond-buying scheme) sitting
in the background that puts a floor on any significant
sell-off," said Lyn Graham-Taylor, a strategist at Rabobank.
"If they've got a slim majority it (the 10-year yield) could
back up 10-20 bps. It's difficult to put a number on it. What we
expect is a retracement rather than a reversal of the overall