EXCLUSIVE: Italian Debt Issuance Head: Not Worried Over Developments in Long-End Part of Curve

27 May 2021

- ‘Would Definitely Say That There Is a Chance for Another BTP Futura Later in the Year’
- ‘We Can’t Exclude That We Will be Reopening’ Green Bond; Timing ‘Still Under Scrutiny’

By David Barwick – Frankfurt (Econostream) – Recent developments in the long-end part of the sovereign debt yield curve are not grounds for particular concern, according to Davide Iacovoni, director general of the directorate of the Italian Treasury responsible for public debt.

In an interview with Econostream last week, Iacovoni suggested that these developments could be expected in view of healthy supply as holders of long-dated bonds reassessed strategy given rising rates and the discussion around inflation and European Central Bank policy.

‘But I’m sure that once a lot of the supply has been better digested by the market and once we have a little bit more clarity about where we are headed, I think this market is very much alive, and I am counting on it being very strong in the next months’, he said. ‘Consider also that in this period, despite the volatility, we have kept on seeing good interest on different long-dated segments like the 30-year, where despite some underperformance we have seen some demand coming back, and also on the 20-year point.’

‘So I would not be particularly worried about what has happened in the last couple of months in the long-end part of the curve’, he added. ‘It’s expected and, I think, physiological.’

As for the Italian Treasury’s possible plans for a 30- or 20-year syndication in May, Iacovoni observed that it was ‘an uncertain period in which it’s not clear where rates and spreads are going.’

‘This is honestly not a market that’s very conducive to a transaction’, he continued. ‘We could still do it; this is the nice thing about syndication, because you can choose flexibly the timing, of course within a framework where people know what bonds we need to bring in the market and what the strategy is for long-dated bonds. But ultimately the month of May was not a month to go to the market. So it’s all market chatter and rumours, but nothing came from us and we were very clear.’

More generally, syndication plans ‘will keep on being focussed on the nominal long-end part of the curve, because this is part of our risk management strategy of having an average maturity of the debt consolidated in the area around 7 years’, he said.

There ‘may be’ another BTP Futura later this year, he said. ‘There is definitely some uncertainty regarding the total funding that we have to do this year’, he said. ‘But I would definitely say that there is a chance for another BTP Futura later in the year.’

The question of a BTP Italia redemption this year is ‘trickier’, given the lack of BTP Italia maturing in 2021, he said. ‘But I see as more probable another BTP Futura, and BTP Italia needs to be assessed, depending on the evolution of markets and our funding needs.’

Asked about further modifications to 2021 funding needs, Iacovoni described a figure of €365 billion in total as possibly ‘a good orientation for the time being’, with ‘important caveats’. While ‘a further widening of the deficit is not in our baseline forecast’, he said, ‘there is the opposite risk, if tax revenues are better than expected, for example.’ The timing of EU recovery fund money is uncertain, he noted.

‘The €365 billion number you mentioned could be a good orientation, as I said, and we’ll keep on staying on that number, also to plan our issuance’, he said. ‘But I think to get a better view of the rest of the year, we need to wait for the summer pause. Around the end of July or mid-August, it will be clearer where we are heading.’

The retail segment is of high importance for Italian sovereign debt, and the Treasury is ‘very open to both potential new instruments and potential new ways of offering existing products to investors’, he said. Retail-focussed products are ‘definitely a work in progress and you can expect additional initiatives in this area in the future.’

As for USD-denominated issuance, this was less about cost than about a diverse investor base, he made clear. Experience shows that a USD-denominated approach can ultimately lead some investors to move into euro-denominated bonds, but ‘[i]t’s still too early this time, because we only re-entered the market in 2019 and need to let this process take place’, he said.

Turning to the Treasury’s recent introduction of 2-year BTPs, Iacovoni expressed satisfaction with the results thus far. ‘The first short-term BTP, the BTP 2022, is behaving very well’, he said. ‘It’s well priced on the curve and there’s no premium we’re paying for that. So I would say that the main objective has been achieved.’

‘And consider also that we say in our guidelines that this new segment won’t be only 24 months, as used to be the case for CTZs, but rather that there is flexibility between 18 and 36 months at issuance’, he added. ‘This will be very crucial because it will allow us to better manage future redemptions, especially in periods when the funding increases quite significantly and we have to manage the result of this higher funding in terms of higher redemptions in the next years.’

The recent announcement by the Treasury of a repo facility is part of an effort to improve cash management, he said. The facility is important in this respect ‘because one the one hand it’s a way to invest excess cash in the repo market, while on the other hand you can use the repo market to fund yourself in case of a temporary need of cash’, he explained. ‘It’s a way to offset somewhat the volatility that we had in the cash account.’

Following high demand earlier this year for the Italian Treasury’s inaugural green bond, Iacovoni said current strategy was focussed on ensuring liquidity. ‘Indeed, we can’t exclude that we will be reopening it’, he said, although the timing of such a move ‘is still under scrutiny’.

‘We don’t have in mind for now building a green bond curve, a goal I know has been expressed by some of our peers’, he said. ‘Our focus is on creating few but very liquid bonds for the time being.’

‘At the same time, we’re very pleased that our green bond has been included in a specialised index called MSCI Global Green Bond Index’, he added. ‘For us this is very important, because we know that a lot of key ESG investors look closely at this index.’

The Italian Treasury hasn’t seen much interest in a BTP with a super-long maturity, he said, but remains comfortable with its 50-year point.

‘So, up to 50-year, there is definitely a lot of demand and in fact the transaction went very well when we launched this bond’, he said. ‘But for longer maturities, we haven’t seen the interest. Maybe there could be interest from convexity players, but they’re not so much our target in terms of investors. We tend to rely more on buy-and-hold investors, liability-driven investors and so on.’

‘This wouldn’t prevent us from doing a private placement of a bond with a maturity greater than 50 years, but I don’t see us offering a public transaction of such very long-dated maturities’, he said. ‘This is the current status; we’re always open to adapting our strategy, but we don’t see the market right now for a transaction like this.’