– Current Market Conditions Unfavorable, Coalition Sources Say
By Silvia Marchetti
ROME (MaceNews) – Italy is holding off for now on new issuance of US dollar-denominated bonds as it sees market conditions, especially the euro’s weakness, as unfavorable, according to ruling coalition government sources.
In a shift from past practice, with the government laying out its funding plans at the start of each year, the new government has not focused on the US market and has furnished few details on its plans for possible dollar-denominated operations in 2023.
In 2022 the government had already pressed pause on issuing more bonds in USD given the weak euro-dollar exchange rate which would have resulted in issuance costs being higher on the dollar-denominated curve than on the domestic one.
The sources, who manage funding needs, said even with the euro now a bit stronger than a few months ago when the euro fell to parity, carrying out similar operations this year required maximum caution.
“Foreign operations are not at present at the core of our issuance strategy, however … were market conditions to change and go back to being favorable, new financial operations on the US market would be launched,” said an official.
Since 2019 when it made a historic comeback to the US market after a 10-year absence, Italy has launched several US-denominated issuances raising a total EUR 20 billion, with the goal to complete the yield curve and strengthen its role of frequent issuer.
“Throughout 2023 we will continue to monitor US market trends, evaluating the possibility of offering new benchmarks, perhaps also on non-conventional maturities, but we need more favorable cost conditions. The euro is still too weak to make it convenient for us,” the official said.
Even though officials are confident that demand for US denominated Italian bonds will not wane, to return to the market, Rome needs to wait for a significant, advantageous realignment of the euro and dollar curves, which are still quite in favor of the USD.
“We will also take into account market demand and the performance of existing securities on the US market,” said another source.
Italy’s overall 2023 issuance strategy will focus on the gradual reduction of issuance in the short end of the yield curve, with more long term bonds in store to reduce exposure to rising interest rates and refinancing risks.
“If we lengthen the lifespan of our public debt, which is already above 7 years, funding will be more sustainable and also less costly in the short run,” said an official.
Sources voiced concern that the hikes in interest rates by the European Central Bank, topped by “unclear communication” over its asset purchases were raising Italy’s public debt cost. Italy’s average annual cost at issuance at the end of the 2022 placements was 1.71%, up from 0.10% in 2021.
“We’ve said it many times over, the ECB should slow down the pace at which it is unwinding its accommodative stance, or at least put it on hold and be less ambiguous in its messages,” said an official.
Rome expects a total gross issuance of medium-long term securities of about EUR 350 billion this year, below the 2022 funding target which stood at EUR 400.
“If we take the EUR 350 billion total in funding needs and dissect it, roughly EUR 90 billion go in estimated borrowing costs for this year, while EUR260 billion in the re-opening of existing maturities,” said an official.
Italy’s lower 2023 funding target benefits from direct European pandemic aid amounting to roughly EUR 50 billion this year, which eases pressure on public debt levels.
According to 2023 funding plans, Italy will also be issuing more maturities aimed at the retail sector to diversify investors’ base and more green bonds, which have so far raised a total EUR13.5 billion.