The volume of debt Italy directly sold to its citizens saw a significant decline this week, indicating a potential shift away from heavy reliance on households to fulfill its borrowing requirements in the future.
Italian citizens purchased €11.3bn worth of BTP Valore bonds during a five-day sale that concluded on Friday, a notable decrease compared to the previous three offerings, which raised €18.2bn, €17.2bn, and €18.3bn, respectively.
Analysts cautioned that this outcome suggests Italy may need to depend more on institutional investors to meet its funding needs, particularly after extending a significant tax relief scheme for private investment.
Retail demand has historically been a crucial source of funding for Italy’s substantial debt burden, with approximately €75bn directly sold to households since the beginning of last year.
“After the very strong demand for Italian government bonds that we have seen in recent months, this could be a first sign that the retail market is becoming somewhat saturated,” remarked Christian Kopf, head of fixed income at Union Investment.
Data from the Bank of Italy reveals a sharp increase in Italian households’ total sovereign bond holdings, surging from €150bn at the end of 2021 to €335bn as of late February, now constituting just under 6 percent of Italian household savings.
Barclays anticipates Italy’s total bond issuance to reach €360bn this year, up from €340bn last year, with net sales after redeeming bonds projected to be €93bn, compared to €87bn in 2023.
The BTP Valore tranche, offering a tax incentive and bonus if held to maturity, experienced slowing demand, prompting Italy to likely issue more than planned to the broader market, noted Mohit Kumar, chief European economist at Jefferies.
Lower demand could also decelerate the rally in Italian government bonds, which outperformed German government bonds over the past year, delivering 5.4 percent in total returns compared to 0.2 percent for the latter, according to ICE Bank of America indices.
While Italy’s strong economic prospects and the European Central Bank’s impending interest rate cuts have buoyed investor optimism, hedge funds have increasingly bet against Italian bonds in recent weeks, with the total value of borrowed bonds reaching €50.7bn this week, up from €38bn at the beginning of the year.
A spokesperson from the Italian finance ministry expressed satisfaction with this week’s BTP Valore offering, noting that officials never anticipated replicating the uptake of the previous three issues.
Analysts at Barclays suggested that, for now, the lower uptake is unlikely to significantly impact Italy’s BTP issuance plans, given the ministry’s provision of a €20bn range for its funding plan, which provides “some wriggle room.”
The Bank of Italy’s latest financial stability report underscored the importance of retail demand for Italy’s debt, emphasizing the risk associated with a persistently high debt-to-GDP ratio.
