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Italy receives orders value EUR 90 billion for the euro zone debt market within the star week

Italy's 30-year bond sale attracted strong demand on Thursday, resulting in near-record borrowing costs. This is the latest sign of investors craving for eurozone debt that offers higher yields than German Bunds.

The Italian Ministry of Finance received orders from investors worth more than EUR 90 billion for the EUR 8 billion on offer – only in second place after the EUR 110 billion offers for two bonds sold in April. The debt should be valued at a yield of 1.73 percent. That would be the second lowest price ever seen in Italian 30-year bonds.

The deal comes two days after the EU first sold bonds to fund the response to the Covid-19 crisis, which generated record breaking demand from investors. Although Brussels has a higher credit rating than Italy and offers lower yields, the order backlog of EUR 233 billion for EU debt demonstrated investor hunger for bonds with a “spread” over Germany, which serves as a benchmark for debt across the euro area.

All German debt is currently trading with yields below zero, with the 30-year bond trading at minus 0.18 percent.

Bonds across the currency bloc have rallied and yielded lower in recent weeks, suggesting inflation continues to lag behind the European Central Bank's target of nearly 2 percent and the region's recovery is stalling due to a surge in coronavirus cases . The expectations are high that the ECB will expand its emergency purchase program for bonds worth EUR 1.35 billion in December.

"I'm not sure the Italian deal would have come off if EU demand hadn't been so strong," said Antoine Bouvet, interest rate strategist at Dutch bank ING. "I think there is an overlap in the investor base for the two bonds that the ECB sees as a pretty warm comfort blanket to get out of there and buy spread."

The Thursday sale, which was handled by BNP Paribas, Deutsche Bank, JP Morgan Chase, Banca Monte dei Paschi di Siena and Nomura, also included an operation to buy back some bonds with maturities of 2021, 2023 and 2025. The exchange of shorter maturity debt versus 30-year bonds show the Italian Treasury Department is using low yields to extend the average maturity of its loans, Bouvet said.

"Longer-term borrowing reduces refinancing risk when yields rise," he added.

EUR 17 billion of new EU bonds sold this week, the proceeds of which will be used to support employment protection systems in Member States, have rebounded in secondary trading. The 10-year bond now has a yield of minus 0.35 percent, a decrease of 0.09 percentage points compared to the time of its issue. This means that the implicit cost of borrowing in Brussels is now lower than in France.

Investors are betting that EU financial support, including the upcoming € 750 billion recovery fund, will ease the burden on countries with higher borrowing costs like Italy.

"The success of EU bonds has made lower-rated loans in Europe a bit safer," said Jim Leaviss, CIO, public fixed income at asset manager M&G Investments.

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