LONDON/ROME (Reuters) - Italy raised $7 billion on Wednesday with its first U.S. dollar bond in nearly a decade, a move that helps to diversify funding sources for the world’s third-biggest public debtor.
The issue, which has been more than a year in preparation, drew more than $18 billion in orders, according to one of the banks managing the deal - a sign of renewed investor confidence after turbulent months for Italian bonds under the previous, anti-European government.
With more than 200 billion euros in annual medium- and long-term refinancing needs, Rome is keen to find investors beyond the euro zone at a time when low rates discourage Italian savers and banks are under pressure to reduce domestic debt holdings.
Italy issued the bond in three tranches with maturities of five-, 10- and 30-years and worth, respectively, $2.5 billion, $2 billion and $2.5 billion.
Barclays, HSBC and JPMorgan are managing the issue.
Italy last borrowed in dollars in September 2010, before the euro zone debt crisis. The outstanding dollar-denominated bonds are maturing in 2023 and 2033 and are worth 5.5 billion euros.
“I think it’s good news in the sense of returning to the [dollar] market and diversifying the investor base. Basically, with these three new bonds, we now have a [dollar yield] curve there,” said UniCredit strategist Luca Cazzulani.
The head of the Treasury’s debt management office Davide Iacovoni told Reuters in July that Italy was “working very intensely” to issue the dollar bond before the end of this year.
The high level of investor interest in the bonds is a result of low yields in both the euro zone and U.S. bond markets, and the recent fall in perception of credit risk associated with Italy, Cazzulani said.
Nearly 70% of euro zone government bond yields are in negative territory. Italy accounts for most of the positive-yielding government bonds available.
The arrival of a pro-Europe government in Rome last month, replacing the previous eurosceptic coalition, has also driven down yields on Italian debt. Ten-year yields IT10YT=RR reached a record low 0.76% in early September.
Rome is also exploiting relaxed market conditions after the European Central Bank said in September it would resume a bond purchase scheme to boost the euro zone economy.
The five-year tranche is set to yield 105 basis points over the mid-swap rate. The 10-year tranche 150 basis points and the 30-year tranche 235 basis points, the lead manager said.
The deal “highlights demand for dollar assets from certain investors that choose not to hedge some FX risk, which boosts the yield you get on the investment,” said Andrey Kuznetsov, a senior portfolio manager at Hermes Investment Management in London.
Rather than face expensive hedging costs, some foreign investors buying dollar-denominated bonds have opted not to hedge their currency risks at all.
Italy has been preparing the groundwork for this bond sale since the end of 2017, when it introduced a new system of guarantees on derivatives that make it cheaper for banks to hold a foreign currency position with Rome.
Editing by Philippa Fletcher