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By Yoruk Bahceli and Giuseppe Fonte
LONDON/ROME, Oct 9 (Reuters) – Investor demand exceeded $20 billion on Wednesday at Italy’s first dollar bond sale in nearly a decade, a move that will help diversify funding sources for one of the most indebted members of the euro zone.
Investor order books increased to $20.7 billion for three different bonds the country is selling, from over $10 billion of the interest indicated when order books were opened on Wednesday morning, according to a document from a lead manager seen by Reuters.
Italy is selling dollar bonds of five, 10 and 30 years’ maturity. The sale has been more than a year in preparation.
“I think it’s good news in the sense of returning to the market and diversifying the investor base. Basically, with these three new bonds, we now have a [dollar yield] curve there,” said UniCredit strategist Luca Cazzulani.
Italy currently has dollar-denominated bonds maturing in 2023 and 2033 outstanding, according to Tradeweb.
The high level of investor interest in the bonds is a result of the low yields in both the euro zone and U.S. bond markets, and the recent fall in perception of credit risk associated with Italy, Cazzulani said.
Nearly 70% of euro zone government bond yields are in negative territory. Italy accounts for most of the positive-yielding government bonds available.
The arrival of a pro-Europe government in Rome last month, replacing the previous eurosceptic coalition, has also driven down yields on Italian debt. Ten-year yields reached a record low 0.76% in early September.
Rome is also enjoying favourable market conditions for its debt after the European Central Bank said in September it would resume a bond purchase scheme to boost the euro zone economy.
The spread was set at 105 basis points over mid-swaps on the five-year bond, 150 bps over mid-swaps on the 10-year and 235 bps over mid-swaps on the 30-year, according to the lead manager document. That was lower than the earlier price guidance for all three bonds.
Orders are over $9.5 billion on the five-year bond, over $6 billion on the 10-year and over $4.9 billion on the 30-year.
Pricing is expected later on Wednesday.
The deal “highlights demand for dollar assets from certain investors that choose not to hedge some FX risk, which boosts the yield you get on the investment,” said Andrey Kuznetsov, a senior portfolio manager at Hermes Investment Management in London.
Rather than face expensive hedging costs, some foreign investors buying dollar-denominated bonds have opted not to hedge their currency risks at all.
Italy has deposited $389,400 at the U.S. Securities and Exchange Commission in New York to cover fees. That allows for a maximum placement volume of $3 billion from U.S. investors.
Italy has been preparing the groundwork for this bond sale since the end of 2017, when it introduced a new system of guarantees on derivatives that make it cheaper for banks to hold a foreign currency position with Rome.
Italy last borrowed in dollars in September 2010, before the euro zone debt crisis, and has 5.5 billion euros worth of dollar bonds outstanding. (Reporting by Yoruk Bahceli and Giuseppe Fonte; editing by Larry King)
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