FRONT STORY SOVEREIGNSVolatility returns to Italy debt
Worst affected European country by coronavirus
Bonds sell off but no signs of distress
ITALY‘s role as a proxy for risk has pushed
BTP yields higher in recent days and while
there are no signs of panic just yet,
investor concerns are growing about the
impact of the coronavirus on the
country’s economy.
Rising yields mark a sharp reversal for
Italy, which has enjoyed blockbuster
demand for its syndications and strong
performance this year on the back of
investors’ search for returns and a general
risk-on tone.
But the country has been caught up in a
sell-off of risk assets spurred by fears
about the rapid spread of the virus.
“The most important thing that’s
driving Italy spreads hasn’t been the
direct coronavirus impact, it’s more that
they are the riskiest sovereign and they’re
used as a risk-off tool by hedge funds and
so forth,” said John Taylor, co-head of
%UROPEANûlXEDûINCOMEûATû
AllianceBernstein.
“So whenever equities do badly, you
normally see Italian bond spreads widen
back out.”
Ten-year BTP yields touched a 2020 low
of 0.855% on February 13, but then
jumped to 1.20% on March 2. A surprise
Fed cut the next day helped push them
back below 1%, though they had risen
back to above 1% by last Friday.
“It’s a response to the general risk-off
environment,” Taylor said.
“Also, positioning didn’t help. A lot of
people were sucked into the rally we saw
at the start of the year and had been
building up long positions.”
Still, there is little doubt that growth in
Italy – already slow – will be impacted.
“The effect on the Italian economy is
GOINGûTOûBEûVERYûSIGNIlCANT vûSAIDû-IKEû
2IDDELL ûHEADûOFû5+ûlXEDûINCOMEûATû
AllianzGI.
“There’s no question at all that Italy is
in a nasty recession right now. Northern
Italy is the richest part of the country and
there are large parts of it that are not
operating right now.”
For some investors, this means taking a
cautious stance.“We are positioned slightly short.
Investors are clearly not happy with the
prospect of further negative growth
numbers out of Italy,” said Hendrik Tuch,
HEADûOFûlXEDûINCOMEûATû!EGONû!SSETû
Management.
“Rating agencies already have subdued
growth prospects, but these will worsen
FURTHERû3AMEûFORûTHEûGOVERNMENTûDElCITû- Italy immediately claimed it needs to
EXPANDûITSûBUDGETû;DElCIT=ûTOûSUPPORTû
growth.”
In a report published last week, S&P
said that the country was facing a 0.3%
growth contraction for the full year given
that it was the hardest hit European
country by the virus.
“A contraction of GDP is on the cards
FORûTHEûEUROZONEûOVERûTHEûlRSTûQUARTERûOFû
the year, and will be particularly
pronounced in Italy, where the outbreak
has taken hold,” it said.
EVERYONE’S PROBLEM
While volatility has reappeared, investors
nevertheless think the sovereign is
unlikely to see a repeat of 2018.
“The situation is different from when
we’ve seen Italy’s spreads bounce around
over the last year or so given this was very
much driven by political issues and fearsOFûMASSIVEûBUDGETûDElCITûNUMBERSûTHATû
would cause downgrades and make their
bonds ineligible to the ECB asset purchase
programme,” said Taylor.
“I don’t think we’re anywhere near that
territory.”
They also believe the European
Commission may take a less strict
approach to budget targets this time
around.
“The Commission would probably take
a dim view but right now, it doesn’t
matter too much,” said Riddell.
“It’s unfortunate that it’s Italy. It wasn’t
their fault so I imagine there would be
some political goodwill rather than last
time when it was a government
deliberately ignoring the rules.”CENTRAL BANK TO THE RESCUE
Investors are also betting the ECB will
catch up with the Fed by loosening policy
to deal with the impact of the virus.
“Markets have been pricing in a
response from the ECB in terms of cutting
rates via tiering and doing additional QE,
and I think they probably will,” said
Riddell.
“It will surely be recognising that
growth will be negative. Therefore, if you
HAVEûNEGATIVEûGROWTHûANDûINmATIONûISûSTILLû
around 1%, why wouldn’t you do more
STIMULUS û)ûWOULDûEXPECTûSIGNIlCANTû
stimulus if not this month, then at the
next meeting.”
AllianceBernstein’s Taylor said the
central bank could ramp purchases back
up to €60bn a month.
h)TALYûWOULDûBEûTHEûBESTûBENElCIARYûOFû
that,” he said.
“To us, the sell-off we’ve seen has
created a buying opportunity.”
Still, not everyone is that optimistic.
“The ECB will have to get very creative
to increase their overall buying
programme for sovereign bonds,” said
AAM’s Tuck.
“So no time for heroics yet, we keep our
short bias and do some tactical trades in
the meantime.”
Helene DurandInternational Financing Review March 7 2020 25BONDS
SSAR 27 Corporates 30 FIG 33 Covered Bonds 36 High-Yield 37 Structured Finance 40Source: Refinitiv Eikon0.850.900.951.001.051.101.151.2010/02/2014/02/2018/02/2022/02/2026/02/2001/03/2005/03/20BID YIELD OF ITALY 10-YEAR BOND6 IFR Bonds 2323 p 25 - 53 .indd 25 06 / 03 / 2020 19 : 18 : 05