The Reward for Lending Italy Money for 50 Years: 2.85%
Posted by hkarner - 6. Oktober 2016
Source: The Wall Street Journal
Investors overlook economic stress in the hunt for yield as Italy’s 50-year bond debuts
Italy’s debut 50-year bond drew strong demand from investors due to its relatively high yield.
Italy sold €5 billion ($5.6 billion) of debt in its debut 50-year-bond issue in a further sign of how much economic stress investors will overlook amid the global hunt for yield.
There were more than €18.5 billion of orders Tuesday for the bonds that mature in 2067 and that were priced at a yield of 2.85%, according to people familiar with the deal. The strong demand allowed the Italian treasury to raise more than the roughly €3 billion to €4 billion that analysts had expected.
Italy’s debt sale comes as borrowing costs in developed nations have sunk to historic lows this year amid tepid global growth and inflation and extraordinary bond buying by central banks. Investors reaching for returns have bought bonds with maturities of as long as a century and from countries with lower credit ratings.
Belgium and Spain both sold their first 50-year bonds in public markets this year, with each raising €3 billion. France, which has sold long-dated bonds in the past, also raised €3 billion in new 50-year debt. Meanwhile, Ireland and Belgium have both sold €100 million of 100-year bonds in privately placed deals.
“The search for yield is one key reason,” said Axel Botte, a fixed-income strategist at Natixis Asset Management.
The yield on Italy’s 50-year bond looks high in relative terms, Mr. Botte said, and there is demand for long-dated securities from institutional investors such as pension funds that need to match their liabilities.
France’s 2066 bonds yield 1.36%, according to Tradeweb. Spain’s 2066 bonds, which were sold with a yield of 3.493% in May, yield 2.55%. Yields fall as prices rise.
But the case for investing in long-dated Italian debt isn’t as clear-cut as for some of the country’s eurozone neighbors. Italian lenders are at the center of concerns over bad loans in the European banking system. Investors also cited a referendum scheduled for December as a vote of confidence in Italian Prime Minister Matteo Renzi that could rattle markets. Meanwhile, economic growth in Italy has stagnated.
Italian debt has underperformed this year compared with Spain, the eurozone’s fourth-largest economy. The gap in yield between Italian 10-year bonds and haven German debt also has widened.
“There’s definitely been some underperformance of Italy relative to Spain over the last month or so as the upcoming referendum weighs on Italian bonds,” said Nick Sanders, a portfolio manager at AllianceBernstein.
Even so, Italian bond yields have fallen this year in absolute terms, as investors faced with an increasing pool of negative-yielding government debt have fanned out in search of returns. Despite a slight increase in bond yields recently, there was still roughly $11 trillion of negative-yielding sovereign debt in mid-September, according to Fitch Ratings.
Moreover, the European Central Bank’s €80 billion monthly bond purchases continue to support eurozone government debt.
“With the upcoming risks in Italy, the fact that yields are so low shows there is still a search for positive yield,” Mr. Sanders said.