Italy sells $3.5 billion of US dollar bonds

Italy will raise a total $3.5 billion for its latest US dollar bond sale on Tuesday, according to a lead manager, while its benchmark yield hit a fresh seven-month high.

Rome, which has been diversifying its funding sources after a sharp rise in borrowing needs due to the coronavirus pandemic, sold three- and 30-year US dollar bonds via a syndicate of banks.

"There was a more robust demand on the 3-year tranche due to the shorter maturity and to an appealing yield. The long tranche needs investors dedicated to this maturity," said Luca Cazzulani, strategist at UniCredit.

"From the Treasury point of view, the issue, which aimed to diversify the investor base, has achieved its purpose."

It is Italy's third venture into this market after it launched its first dollar issuance since 2010 in October 2019. That has helped it build a yield curve in US dollars, with Tuesday's sale adding to five-, 10- and 30-year bonds issued since October 2019.

Italy managed to cut the yield it offered on both tranches, with the shorter bond receiving over $4.8 billion euros of demand and the longer over $6.2 billion, according to the lead manager, though the yields Italy will pay were cut by less than on past dollar deals.

"It hasn't tightened as much from initial (price) guidance as I would have expected," said Peter McCallum, rates strategist at Mizuho. "Some of that might be the fact that it's not too attractive...when swapped back into euros compared to existing BTPs."

Analysts said that for the 30-year bond, that may also reflect greater anxiety around rates volatility in the United States.

Italy also raised 5.5 billion euros in an auction of short-term and inflation-linked bonds.

The issuance comes as Italian bond yields face upward pressure, given uncertainty over the pace of the European Central Bank's bond buying, which holds down borrowing costs, and a budget deficit set to surge to a 20-year high.

On Tuesday, the 10-year yield rose 3 basis points to 0.83%, its highest level since October 2020.

Still, positive momentum building around Italy's recovery prospects supported the issuance. Italy unveiled a 222 billion euro economic recovery plan on Monday, after reaching a deal with the European Commission on the use of its recovery fund.

Ratings agency S&P affirmed Italy's BBB rating - the highest among the main rating agencies - with a stable outlook last week, citing the fiscal stimulus and accelerated vaccinations against the coronavirus.

Broadly, there was little clear market direction ahead of the US Federal Reserve meeting starting on Tuesday, with Germany's 10-year yield, the benchmark for the euro area, unchanged at -0.25%.