October 17, 2018 / 12:22 PM / a month ago

Italy's long-dated bonds rise on debt sale annoucement, stocks sell-off

LONDON (Reuters) - Long-dated Italian government bonds were being sold off on Wednesday after the government announced a buyback and reopening of longer dated issues, as global stocks markets came under renewed selling pressure and dented appetite for riskier assets.

FILE PHOTO: Italian Economy Minister Giovanni Tria attends as Prime Minister Giuseppe Conte (unseen) speaks during his first session at the Lower House of the Parliament in Rome, Italy, June 6, 2018. REUTERS/Tony Gentile/File Photo

In a sign of a recovery in the broader Italian market, short-dated Italian bond yields remained lower on the day.

Italy announced the bond buyback, combined with a reopening of several long-dated bonds, in a bond exchange deal due later this week.

While buybacks tend to boost the Italian market, the announcement that this will take place with a tap of existing bonds put upward pressure on long-dated yields.

Italy’s 10-year government bond yield was up 3 basis points to a session high of 3.48 percent, pushing the gap over Germany Bund yields above 300 basis points..

The short-end of the curve, which is more directly impacted by budgetary concerns held lower, however.

Rome on Monday officially approved an expansionary budget, but markets are relieved that Economy Minister Giovanni Tria remains in office, prompting a strong run in Italian bonds since.

Italy’s two-year government bond yield was down 4 basis points at 1.55 percent, having hit a one and a half week low at 1.48 percent early in the session.

Next year’s projected 2.4 percent of output deficit is well below the EU’s 3 percent ceiling - a policy to discourage member states from going down a path of unsustainable spending - but it is up sharply from a targeted 1.8 percent this year.

This contravenes EU regulations that call on Italy and other highly indebted countries to steadily narrow the shortfall towards zero. Analysts see a likelihood the European Commission will reject the budget.

Last week, many appeared to be positioning for worse news on the budget front, with data suggesting investors were going heavily short on Italian debt, said UniCredit rates strategist Luca Cazzulani.

Thomson Reuters data shows that open interest in short-dated BTP futures was at its highest in over a year on Oct. 11, and remained elevated for the rest of the week.

“The fact that you had such high open interest at a time of dropping bond prices suggests that a lot of shorts were coming into the market,” said Cazzulani. “With the absence of any negative news this week, some of that will come out.”

A renewed sell-off in world stock markets accelerated the selling of long-dated Italian debt while boosting demand for safe havens such as high-rated Germany.

Germany’s government bond yield, the benchmark for the region, hit a two-week low of 0.457 pct after global stock markets came under renewed selling pressure..

With the exception of Italy, most other euro zone bond yields were 2-3 bps on the day.

Reporting by Virginia Furness; additional reporting by Angelo Amante and Crispian Balmer in Rome; Editing by Sujata Rao and Alison Williams

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