Italian Bond Exchange Takes Advantage of Calm Before Storm

(Bloomberg) -- Italy bought back short-term bonds and sold longer-maturity debt on Thursday, taking advantage of a period of relative calm to ease repayments in coming years.

The Treasury exchanged 3.8 billion euros ($4.38 billion) of inflation-linked securities, known as BTP Italia, for five nominal bonds with maturities ranging from 2025 to 2046. That was more than the 3 billion-euro outlined by the Treasury beforehand.

The country faces two credit-rating decisions by the end of the month, while the European Commission is due to respond to Rome’s budget plans that are in breach of European Union rules at face value. The exchange helped the country’s yield curve to continue its steepening. The difference between two- and 10-year yields hit 222 basis points, the highest level since March.

“They need to raise cash so finding a quiet time to do that is important,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA. The Italian Treasury “needs to refinance maturing debt by issuing new bonds and that process is almost continuous given that Italy is Europe’s largest issuer.”

Italy bought back the BTP Italia maturing in April 2020 and sold bonds maturing in 2025, 2028, 2029 and 2046 through a syndication of banks. Italy’s 10-year yields were up 3 basis points to 3.58 basis points at 2:31 p.m. in London.

The exchange may benefit domestic banks too, which also own the securities, while there was speculation that dealers of Italian securities may be facing shortages of the nominal bonds being sold. Italy’s yield curve has also come under pressure as recent turmoil over its budget has pushed up those on short-dated securities, while longer-dated yields have stayed relatively anchored. The cash bond market has struggled with liquidity.

Moody’s Investors Service and S&P Global Ratings are due to review Italy before the end of the month. Both have the country two notches above junk, with Moody’s having a negative outlook. The EU Commission is set to give its reaction to the government’s budget plan by Oct. 22.

Elsewhere there were signs that the EU would be likely to reject Italy’s budget. Commissioner for Economic Pierre Moscovici said that the institution had many questions on the proposals, while President of the European parliament Antonio Tajani said he was against the plan. Italy’s Deputy Premier Matteo Salvini said that the draft submitted to the bloc would not be changed by a “single comma.”

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