Select your investor profile:
This content is only for the selected type of investor.
Individual investor?
Multi Asset
Ecb impact on italian spreads
Italy's spreading problems
November 2018
The end of the ECB's quantitative easing programme will put Italian government bonds under more pressure.
Italy’s latest spat with Brussels has been generating headlines. But if crisis strikes, it’s likely to come from a different direction: Frankfurt. That’s because Italy has a debt flow problem. For all the friction the country’s new populist coalition is generating with the European Commission over Italy’s proposed budget, the ultimate source of near-term market tension is the European Central Bank.
That's because Italy has been a major beneficiary of the ECB’s quantitative easing programme. Since the start of QE, the central bank’s purchases of Italian debt have outstripped the volume of new government bonds the country has issued. But as the emergency programme comes to an end, that trend will go into reverse.
Italy’s current budget imbroglio brings forward a problem that would have arisen in the coming months anyway: without ECB buying, Italian yields have to rise in order to draw in private sector funding.
In October, the ECB cut the amount of bonds it was buying under QE to EUR15 billion a month from EUR30 billion – itself a halving of the rate at which it was buying bonds in 2017 – ahead of ending it altogether before the New Year. Then, for the first time in years, price-sensitive private buyers will determine where Italian government bonds trade and, ultimately, whether country's EUR2.3 trillion debt pile - the third largest in the developed world - is sustainable.
bye bye buyer
Italian government bond spreads vs ECB purchases and Italian government issuance
By the start of November, the ECB held EUR362 billion of Italian government debt, some 17 per cent the ECB’s total holdings of government bonds. As the ECB has bought less debt, Italian yields have been rising. The spread on Italian 10-year bond yields over equivalent German bunds has recently risen above 300 basis points, up from an average of 141 basis points when the ECB had its foot fully on the monetary pedal.
Current projections suggest that on a net basis, and factoring in ECB purchases, the private sector will have to absorb EUR57 billion of Italian government bonds next year. This compares with EUR11 billion in 2018 and a negative EUR54 billion in 2017 (ie there were net sales by the private sector in that year).
The question is what that means for spreads. Even if conditions calm down, spreads are unlikely to return to their averages of the past few years. As a best guess, the new range for Italian debt is somewhere between 250 to 350 basis points – the top of the range representing the level at which bank deposits flooded out of peripheral country banks during the euro zone crisis of 2010-2012. At the same time, our economists estimate that once Italian sovereign yields rise above 4 per cent, the debt becomes unsustainable, other things being equal.
As for now, concerns about Italy’s relations with its European partners mean that financial markets are starting to price in the risk the country drops out of the euro, which will contribute to the wider spread. Currently, our estimates suggest investors are demanding 200 basis points for credit risk and 100 basis points for the possibility Italy will be forced to re-denominate – we estimate that the market is pricing in a 7 per cent probability that Italy will be forced out of the euro over the next couple of years.
Italy is back on the front burner – and with reason.
related articles
Multi Asset
Hex Romana
Andrea Delitala, Head of Multi Asset Euro, Luca Paolini, Chief Strategist
June 2018
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.