‘Magic moment’ for Italian bonds as foreign interest revives

International investors look poised to reverse a decade of disinvestment from Italian government bonds, as high yields and encouraging economic reports spur demand for the debt, latest data shows and analysts say.

A vote of confidence in what has for years been seen as one of the riskiest euro zone bond markets would boost Rome’s efforts to manage the bloc’s second-largest debt pile, as the European Central Bank winds down its bond purchases.

Foreign holdings of Italian government paper increased in February after 10 consecutive monthly declines, according to Bank of Italy data.

Moreover, in April the value of Italian notes borrowed by investors betting on a fall in their prices had dropped by around 40% to $27 billion from a mid-November peak of $46 billion, S&P Global Market Intelligence data showed.

Analysts say firmer-than-expected economic growth, declining public debt, and the prospect of political stability under Giorgia Meloni’s seven-month-old government are starting to lure foreign investors back to Italian bonds, demand for which proved resilient even as recent banking turmoil roiled world markets.

Domenico Siniscalco, vice chairman of Morgan Stanley and a former Italian economy minister, said Italy was no longer seen as a target of speculation, and international investors were now looking at the country with “total calm and confidence”.

“This is a magic moment for Italian bonds,” he told Reuters.

There is much lost ground to make up.

The share of Italian government debt held by foreign investors fell to below 20% at the end of 2022 from around 50% before the 2008 financial crisis, Bank of Italy data shows. The 2012 euro zone debt crisis and the COVID-19 pandemic triggered sharp sell-offs.

Luca Cazzulani, head of strategy research at UniCredit, said the level of yields now offered by Italian paper makes it hard for foreign banks and funds to ignore.

“Keeping an underweight position on Italy will risk hurting (investors’) performance,” he said.

The yield on Italy’s 10-year BTP bonds has risen from a record low around 0.4% in February 2021 to about 4.2%, following the massive ECB rate hike cycle which began last July.

The 10-year yields are almost double those of higher-rated German peers and some 70 bps above benchmark US yields.

Economic growth in Italy, traditionally the laggard of the euro zone, has consistently beaten expectations since the end of the COVID pandemic, with gross domestic product (GDP) expanding by 3.7% last year after 7.0% in 2021.

That kind of growth represents a post-pandemic rebound which analysts say is not sustainable, but the positive surprises continued in the first quarter when GDP rose 0.5% from the previous three months.

In April the Treasury hiked its forecast for the full year to 1.0% from 0.6%.

“We are already seeing a more positive attitude towards Italy from non-domestic investors,” said Filippo Mormando, fixed income strategist at Spanish bank BBVA, referring to the take-up of Rome’s most recent syndicated bond deal, and financial flows in the latest balance of payments data.

The new trend started in April, Mormando said, thanks to a investor perception that global central banks would hike rates less aggressively after US banking turmoil, and to progress made by Italy in covering its funding needs.

Italy has already met its net financing requirements for this year, well ahead of Germany, France and Spain.