January 14, 2019 / 4:51 PM / 5 months ago

Italy to brave bond market after first wave of euro zone deals fly

* Italy hires banks for new 15-yr bond deal

* Sale to follow strong syndicated debt deals in early 2019

* Investors say would look at new Italy deal

* Spain also expected to sell bonds via a syndicate in Jan

By Abhinav Ramnarayan and Dhara Ranasinghe

LONDON, Jan 14 (Reuters) - Record investor demand for the year’s first wave of euro zone government bond sales sets the stage for new debt issuance from Italy and Spain, whose debt agencies are keen to capitalise on the conducive environment, bankers said.

Italy announced on Monday that it has hired a syndicate of banks to sell a new 15-year bond to be launched soon, subject to market conditions.

Spain is expected to follow with a syndicated bond next week, bankers told Reuters, following similar issues from Belgium, Ireland and Portugal which raised a combined 14 billion euros last week. Those sales drew huge demand from international fund managers, generating a total 70 billion euros of orders.

Smaller euro zone countries have traditionally used syndication to broaden the investor base for their bonds and compete with larger countries whose debt attracts demand because of its benchmark status.

Bigger peers like Italy meanwhile use syndication to target particular groups, such as international or retail investors, or to conduct long-dated bond sales that may struggle to gain traction at auction.

Adding in bond auctions, euro zone governments last week raised almost 40 billion euros, according to Commerzbank.

Such heavy supply is typical of early January, when borrowers try to take advantage of fund managers’ desire to put money to work. The sales also come after a volatile end to 2018 and as signs of decelerating world — and euro zone — growth make government bonds more attractive to investors.

Italy’s offering is likely to attract scrutiny because of the turbulence in its assets last year.

Italy last completed a syndicated deal in January 2018, selling a 20-year bond. That was before a populist government came to power in the summer, sapping appetite for Italian bonds.

“They need to be very sure that they are going to get the sort of international demand they need to get one of those large syndications over the line,” said one banker, who managed some of last week’s deals and who asked to remain anonymous.

Sentiment towards Italy has improved since it agreed to cut its deficit target for 2019 — reflected by successful auctions last week — but investors might hold out for extra yield over Italy’s existing issues.

Christel Rendu de Lint, head of fixed income at Union Bancaire Privée, which has 128.4 billion Swiss francs ($130.71 billion) of assets under management, said her fund may use the issue to change its cautious stance on Italy.

“We actually got out of Italian debt in May last year when we first got a hint that there might be a 5-Star/League coalition and we have stayed out of that market ever since. But this upcoming syndication might actually be an opportunity to get back into it,” she said.

Other investors told Reuters they would consider investing in a new Italian issue. Italy’s outstanding August 3034 bond was trading at a yield of 3.35 percent on Monday, a 292 bps premium over the equivalent July 2034 German Bund .

“Even with the recent spread tightening, yields are relatively attractive for insurance firms and long-term investors so the sale should go well,” said Patrick O’Donnell, an investment manager at Aberdeen Asset Management.

Roberto Coronado, a portfolio manager for Pinebridge Investments, agreed that Italy was attractively priced.

“I think 250 bps over (German) Bunds is where fair value would be and at the moment we are getting a bit extra,” he said, referring to 10-year debt.


Italy and Spain typically raise 6-9 billion euros each year apiece via syndicated bond sales.

France may also be a candidate to sell debt in January as it targets a 2019 borrowing requirement of nearly 237 billion euros, while Greece may finally bring a long-awaited 10-year syndication, bankers said.

“Spain in particular will be very encouraged by the demand from last week, especially the Portugal trade, and I wouldn’t expect them to hang about,” said the banker.

Spain is enjoying strong growth and an improving credit profile, while still offering healthy returns. Spanish 10-year bonds yield 1.42 percent and pay a 122 basis point premium over German debt.

“Spain and Portugal both look like reasonably safe places to put your money, but you are still getting paid a premium for it,” said Rendu de Lint at UBP.

“That’s the attraction, especially at a time when we have been running low ‘credit’ risk across our portfolios.”

($1 = 0.9823 Swiss francs)

Reporting by Abhinav Ramnarayan and Dhara Ranasinghe; Additional reporting by Sujata Rao; Editing by Catherine Evans

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