Industry Updates

Investors exit Italian bond ETF in fears ECB might curb asset-buying

Italian BTPS yields rose 122bps above German bunds for the first time this year on Monday

Jamie Gordon

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BlackRock’s Italian government bond ETF saw outflows last week on fears the European Central Bank (ECB) might slow its bond-buying programme in the coming months.

According to data from Ultumus, the iShares Italy Govt Bond UCITS ETF (IITB) saw $65m outflows in the week ended 14 May.

The negative sentiment towards Italian government debt came to a head on Monday, as borrowing costs hit an eight-month high.

This followed speculation that the success of COVID-19 vaccinations could prompt the ECB to curb its pandemic emergency purchase programme (PEPP), which to-date has offered headroom for the Italian government to plan large expenditure on the pandemic recovery and additional reforms tabled by prime minister Mario Draghi.

Poor sentiment was likely not helped by comments from League party leader, Matteo Salvini, over the weekend, who said Draghi would be unable to enact reforms demanded by the European Union because there is no consensus in his unity government.

All this saw Italian government 10-year yields shoot up 16 basis points last week and as much as six more points on Monday. While sell-offs also occurred in France and Spain, the gap between Italian BTPS and the region’s benchmark, German bunds, rose above 122bps, a gap not seen since late 2020.

However, Althea Spinozzi, fixed income strategist at Saxo Bank, said the Italian government debt sell-off is overblown and that the ECB is unlikely to begin tapering its PEPP anytime soon.

“Some are pointing to the fact that the ECB decided to increase purchases under PEPP in February because German real yields were rising,” Spinozzi continued. “Now that German nominal yields are rising, but real yields are stable, it opens a window for the ECB to begin tapering.

“It may be a strategy that could be considered for Germany, however, other countries of the bloc are not ready for it.

“Indeed French, Italian and Spanish real rates are rising, pointing to the fact that financial conditions might be tightening already in specific countries. Therefore, the ECB will most likely increase support rather than withdrawing it in the June meeting.”

Spinozzi added Salvini’s comments should not weigh on Italian BTPS sentiment in the short-term, given Salvini is looking to put Draghi forward for the country’s presidency at the beginning of next year and Italy will benefit from Draghi’s stewardship until then. 

The risk that new elections bring a populist Eurosceptic coalition is rising but, as the market has learnt, things in Italian politics can change quickly. Thus, it would be wrong to price in such a distant threat in BTPS, unless presented earlier.” 

Spinozzi noted outflows in European sovereigns are likely to occur in the mid-term, but these would not be confined to Italy and would likely be the result of rising yields across the board, until a new equilibrium is found after the German election.

“Investors do not want to hold government bonds in general because the risk outweighs any benefit that could be drawn by unprecedently expensive sovereigns offering near zero yields,” Spinozzi added. “By holding these securities, one would only increase a portfolio’s interest rates sensibility amid a rising interest rate environment.”

Overall, Spinozzi remains positive about the short-term outlook for Italian BTPS, with the debt class the only covering in the euro area able to offer a positive yield starting from four years.

Negative deposit interest rates are forcing investors to look at where to park cash, and BTPS are one of the few instruments to provide short-term positive yields. Right now, they are offering a pick-up over Greece making them even more appetible.”

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