November 6, 2013 / 2:05 PM / 4 years ago

UPDATE 2-Italian inflation-tied retail bond sets European record

By Valentina Za

MILAN, Nov 6 (Reuters) - Italy raised a record 22.3 billion euros from the sale of a four-year inflation-linked bond that concluded on Wednesday, with institutional players snapping up paper aimed at small investors.

It was the biggest single bond sale by a European government, beating the 18 billion euros ($24 billion) raised a year ago by a similar bond and sending a strong signal of investor confidence in Italian debt.

Italy has now met nearly 95 percent of its annual funding goal and analysts said they expected the Treasury to cancel its mid-December bond sales.

Wednesday’s bond offered generous protection against the effects of domestic inflation to Italian savers, as the Treasury looked to broaden its investor base at a time when Italian banks may not be able to boost much further their sovereign bond holdings - at a euro era high as a share of assets.

The Treasury halted the offer after a day and a half, making use of an early closing option it had planned to exercise if it sold at least 8.5 billion euros on the first day. The bond sold a record 16.8 billion euros on Tuesday.

The previous sale in April raised 17.1 billion euros in two days while the offer in October 2012 ran over four.

“It is clearly a very successful product able to attract demand across the board,” Citi analyst Jamie Searle said.

“The previous two issues showed it was beginning to draw institutional demand also from foreign investors, not just domestic.” Foreigners bought 12 percent of the April issue.

ATTRACTIVE RETURNS

Analysts said a real coupon of 2.15 percent on the new bond made it very attractive for professional investors.

It is a higher return than that offered by the conventional inflation-linked bonds Italy sells at regular debt auctions, and would still match the yield of a same-maturity fixed-rate Italian bond even if inflation halved from current levels.

The bond also offers protection against deflation, which the head of Italy’s main business lobby Confindustria warned on Wednesday was possible.

Italy’s annual inflation rate slowed to a four-year low of 0.7 percent in October. The price index to which these linker bonds are tied stood at 0.8 percent.

The Treasury has been looking at ways to curb demand from institutional investors but has not changed yet the way it sells these bonds, meeting orders in full.

The new bond matures in November 2017 and brings total repayments that year to 185 billion euros. This figure is due to rise, possibly posing a refinancing challenge, as Italy issues three-year bonds next year and two-year paper in 2015.

Meanwhile, however, UniCredit analysts said Italian bond yields would benefit from lower supply pressure until year-end.

Italy first launched a “BTP Italia” bond in March 2012 in a bid to tap its wealthy households in the face of a redemption hump and amid reluctance abroad to hold its debt.

The situation has since improved for the world’s fourth-largest sovereign borrower thanks chiefly to support from the European Central Bank and a tentative upturn in the euro zone’s economy.

Foreign appetite for Italian debt has strengthened and analysts say domestic households may return to increase their government bond portfolios after reducing them during the sovereign debt crisis.

Italian households’ net wealth stood at 8.6 trillion euros at end-2011, according to the Bank of Italy, or more than four times Italy’s 2-trillion euro public debt.

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