Yields on lower-rated euro zone bonds edged away from record lows today as a debt exchange in Italy prompted some investors to book profits after a recent boost to the rally from the Federal Reserve.
Italy is offering to exchange new bonds maturing in 2022 for outstanding 2015 and 2017-dated paper as it continues efforts to extend the average life of its debt and reduce refinancing risks should market conditions sour.
The euro zone’s lower-rated sovereigns, one-third or more of whose debt expires in the next three or four years, have scheduled several debt exchanges or buybacks in recent months to ease this near-term redemption hump.
The refinancing burden has grown since the height of the crisis in 2011 and 2012, when investors’ reluctance to take on longer-term risk meant periphery countries were able only to sell short-dated bonds.
Italy’s offer to exchange up to €2.5 billion worth of bonds prompted a sell-off in the debt by investors who will demand a higher premium for holding longer-term paper.
It is also an opportunity to book profits following a 7 basis point drop in yields on Thursday after the Federal Reserve signalled that rising inflation would not trigger an increase in U.S. interest rates any time soon.
Italian 10-year yields rose 2 basis points to 2.82 percent, having fallen as low as 2.77 percent the previous day - within a whisker of record lows. Spanish, Portuguese and Irish yields were up 1-2 bps as well.
"The exchange may be a short-term technical factor that's pushing the long end of the yield curve higher in Italy, but that's part of the game," DZ Bank strategist Christian Lenk said. "In the end it's a good thing, If you look at the redemption profile of Italy and Spain - these debt swaps are a good way to smooth the upcoming hump."
UniCredit estimates that after today's exchange, Italy will have swapped about €9 billion worth of 2015 bonds.
“We expect at least one more exchange auction, given that 2015 remains a rather heavy year in terms of redemptions, currently slightly more than 200 billion euros,” UniCredit strategists said in a note.
Discipline
With European Union finance ministers meeting later today, proposals to ease fiscal discipline in the bloc were also on markets' radar. Italian prime minister Matteo Renzi is thought to be pushing for more wiggle room on budget targets.
"I don't know if they will come out with a firm decision but if that's the case you might argue that's an element that's not good for the periphery," said KBC strategist Piet Lammens.
Moody’s did not announce a decision on Spain’s Baa2 ratings before the market opened but could do so after the close, with some analysts and investors expecting an upgrade.
Under new European rules, ratings firms had to announce in advance dates at which they might change a country’s ratings or outlook.
Reuters
