Italy has, arguably, Europe’s most at-risk banking system, yet this week the country has pulled off something of a coup. It has managed to issue 50 year government bonds. Never mind that in the past 50 years the country has changed prime ministers more than 30 times,
Italy is offering investors the privilege of receiving 2.80% per annum for the next 50 years.
The bond sale netted bids of over €18bn for a final bond issue size of €5bn. The yield is the same as 30 year bonds the country issued earlier in 2016. The successful issue has been largely put down to the fact that investors are desperate to buy bonds paying a ‘reasonable’ yield. Keep in mind reasonable is a very flexible term and many investors such as insurance companies and life offices are mandated to buy government bonds almost regardless of the yield.
Added to this is the fact that the European Central Bank has been buying so many bonds as part of its quantitative easing programme that investors are having difficulty of finding bonds to buy. With over $US10 trillion worth of bonds around the world trading at negative yields, the 2.80% on offer is seen as good value, by some.
Italy is also in a state of flux, again, and Prime Minister Matteo Renzi has called a referendum in December seeking a mandate for economic reform which may well backfire and see him resign if it fails. As bond prices around the world rise from their record lows in July and August it would seem a brave person or fund to load up on 50 year Italian debt.