'BTP Italia' seen drawing good retail demand in key test

MILAN: Higher returns on Italian debt are expected to attract healthy demand from Italian savers for a new "BTP Italia" bond on offer next week, in a key test of retail investors' support for the Treasury's mounting refinancing needs.

Italy's task of refinancing the world's third-largest debt becomes more challenging after December when the European Central Bank ends its bond-buying programme.

The move compounds the challenge arising from shrinking foreign demand for Italian debt in reaction to an anti-austerity government that has rekindled euro break-up fears.

Ordinary Italians could play an increasingly important role in helping the Treasury meet its funding goals.

A drop in market yields in recent years has reduced the share of Italian bonds held by domestic households to around 5 percent of the total, down from around 17 percent at the height of the 2011-2012 euro zone crisis.

But risk premiums that Italian 10-year bonds pay over German debt have recently hit a 5 1/2-year high following a sell-off triggered by the government's spending plan and anti-EU stance.

"Italian paper has returned to being attractive for retail investors and fund managers need to give it fresh consideration after giving it a backseat in recent years" said Alessandro Tentori, chief investment officer for Italy at AXA Investment Managers.

Italy starts offering the new four-year BTP Italia bond on Monday. The offer runs over four days, with the first three reserved or small savers, whose orders are met in full.

Italy first offered the bonds, which pay a generous premium over the national inflation rate, in 2012, in an effort to tap domestic wealth in the face of scant foreign demand for its debt.

They proved hugely successful with institutional buyers as well, leading to some record-sized issues that prompted the Treasury to cap the amount allotted to professional investors.

Rome's new populist government has mulled measures to funnel domestic savings into the country's 2.3 trillion-euro debt, but sources told Reuters the Treasury opposed them because they ran against European rules.

Analysts at UniCredit expect next week's bond to raise 5 billion to 8 billion euros, in line with previous issues.

They expect the bond to pay a coupon of between 1.30 and 1.35 percent over the inflation rate, the second-highest real coupon among the 13 BTP Italia bonds issued until now. The previous BTP Italia bond, issued in May, carried a real coupon of 0.55 percent for an eight-year maturity.

"Good demand from Italian retail investors for the new BTP Italia would be a good signal to the market," UniCredit's fixed-income strategist Chiara Cremonesi said.

"But it remains important to have a diversified base of investors, and foreign ones play a key role," she said.

Cremonesi estimates Italy will need to issue 260 billion euros ($295 billion) in medium-to-long term bonds next year, 25 billion euros more than in 2018, also due to a 7 billion-euro planned increase in cash deficit.