Fixed Income Analysis /
Global

Primary Market Focus - We prefer the 10Y bond at the upcoming auction: the area is cheap

    Luca Cazzulani
    Luca Cazzulani

    Deputy Head of FI Strategy

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    UniCredit
    28 March 2022
    Published byUniCredit
    • On Thursday Italy will sell EUR 2.5-3.0bn of BTP 1.1% Apr27 and EUR 3.0-3.5bn of BTP 0.95% Jun32, for a total of EUR 5.5-6.5bn. An additional EUR 1.1-1.3bn may come from the non-competitive reopening. EUR 16.6bn of redemptions will support the auction.
    • The 5Y area of EGB curves has cheapened against the wings, reflecting the hawkish ECB, and we do not see much risk of an additional cheapening. If anything, the cheapening of the 2/5/10Y barbell on the BTP curve has lagged that on the swap curve. In RV terms, we like BTP Apr27 versus the Aug26.
    • The 10Y area has cheapened significantly against the 5Y and the 30Y area. At almost 100bp, the 5/10Y BTP spread is at its highest level since mid-2019. A possible micro RV idea might be to sell BTP Mar32 to buy Jun32 as their Z-spread difference is about 1.5/2bp off the average. On Thursday, Italy will sell EUR 2.5-3.0bn of BTP 1.1% Apr27 and EUR 3.0-3.5bn of BTP 0.95% Jun32. There will be no offering of CCTeu as Italy has just launched a new benchmark, CCTeu Oct30, via syndication. In total the auction will be EUR 5.5-6.5bn, with an additional EUR 1.1-1.3bn from the non-competitive reopening. EUR 16.6bn of redemptions from BTP 1.2% 1Apr22, an old five-year bond, will support the auction. So far this year, Italy has issued around EUR 75bn of debt, which represents 25% of our expected target for the year. Given there were no redemptions in January or February, Italy is now well advanced in its net funding. The following chart shows that most of the supply pressure is now behind us. Even with lower ECB purchases in 2Q and under the worst-case assumption that there will be no ECB purchases in 3Q, pressure from net supply until year end should be limited. There are upside risks to supply depending on which measures are adopted to support the economy, but we see such risks as modest.