The Italian Treasury tries again. After the launch in the amount of $ 3.5 billion of a thirty-year bond with maturity May 6, 2051 and coupon of 3.875% in May of this year, the “reopening” of this issue arrived in the last days, with the additional placement of approximately one billion, in the face of requests that reached a total of 2 , 2 billion.
The diversification of funding sources has always been one of the main objectives of the Italian Treasury, which with this “syndicated” placement, that is, carried out through a consortium of banks, wanted to test the response of a type of investors not used to betting on the Italian public debt. In this case, the underwriters were mainly institutional funds (pension, insurance, etc.) with an audience of Asian investors that reached 40% of the total.. An interesting balloon of art to evaluate the degree of interest in the Italian public debt and which represents a good success afterwards the warm welcome given by the domestic market to the BTP Futura maturing on September 16, 2033 which raised a total of 2.7 billion.
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The 30-year bond risk
But who are the Italian bonds in dollars suitable for, and above all how did the “twin” issue launched last spring. The answers to these questions are intertwined. First of all, the 30-year deadline is not very suitable for traditional private savers, that is, families. In general, these are very volatile securities, whose market value, and therefore the prices on the secondary for those wishing to sell them before the natural maturity, are extremely volatile. B.auction a half point increase in market rates to cause a holding loss of approximately 7-8%. Conversely, if market rates fall, these securities will appreciate equally. But this is not the scenario we are heading towards, neither in Europe nor in the United States: due to inflation above 6% in the US and which has reached peaks of over 4% in some European countries, the future direction of interest rates is marked: we go towards an increase and therefore towards a loss in value of the securities already issued.
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A gain of 15%
So why so much interest in the 30-year dollar-denominated BTP? A quick look at the yield on the issue in these six months immediately reveals the reason: between the yield differential (spread) with respect to the same duration in the US, the thirty-year Treasury, the generous coupon, and the revaluation of the dollar against the euro, who has invested 6 months ago on this bond it has already taken home a yield of over 15%. Let’s see how. Let’s start first with the coupon and the yield, both generous. The coupon at 3.875% immediately led to a strong appreciation of the security on the secondary market which rose to a price of approximately 107.7 points above the redemption value, equal to a yield of approximately 3.6%. Furthermore, in the period May-November, the euro-dollar exchange rate depreciated by approximately 6.5% (by 7% from the beginning of the year) and consequently the capital gain in dollars was of a similar amount. If you add to these figures the interest accrued of around 2%, you get a gain of 15%. Two main factors determined the bulk of the gain: the appreciation of the dollar against the euro and the yield differential between the Italian thirty-year and the American Treasury of the same duration, which currently offers a yield of about 2% (exactly l 1.97%). The Italian bond therefore pays around 160 cents of a point more than its stars and stripes counterpart: a spread partly due to the greater risk of the Italian debt compared to the Uso debt and partly to the lower liquidity of the instrument.
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The scenarios
And now? Institutional investors, as we have seen, know how to do their calculations well and have not missed the possibility of subscribing to a new “Italian card” in dollars. However, future earnings prospects are not as rosy as they have been in the past six months. The risk of an increase in US rates, although not immediate, would cause the prices of the Italian bond in dollars to fall (today well above par). The new tranche was in fact placed at a price already above par, which is close to 105 (104,966). A bullish movement in rates would bring this value down. Furthermore, the prospects for the euro / dollar exchange rate do not seem so negative for the European common currency. According to analysts, the margins for further appreciation of the dollar are narrow. Where is the convenience then: also for the saver, as well as for the issuer in diversification. And then in a good level of absolute return (which is still half of the current US inflation at 6%) and finally on a bet on future changes in the exchange rate.
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