Italy in focus as ECB readies to end bond-buying programme
LONDON: Italy’s borrowing costs continue to slide even though many big investors are singling it out as the eurozone member most vulnerable to a withdrawal of European Central Bank (ECB) stimulus.
The third-largest of the 19 economies that use the euro is second only to Greece as the bloc’s most indebted country, and is seen as fragile even after recovering from a decade in or near recession.
But as expectations grow that the ECB will wind down its €2.55 trillion (RM12.28 trillion) bondbuying programme this year and start lifting interest rates next year, Italian bonds continue to surprise with strong gains.
The yield premium investors demand for holding Italian 10year bonds over top-rated German debt is 133 basis points — less than before inconclusive March 4 elections delivered a surge for populist, high-spending parties.
“The question is, if the idiosyncratic issues won’t impact Italian bonds, what will?
“I think what will impact them is the broader withdrawal of monetary stimulus across the euro area,” said Scott Thiel, deputy chief investment officer for fixed income at BlackRock.
He has given the on Italian bonds an “underweight” rating and believes the ECB’s withdrawal of stimulus will not be as smooth as the winding down of quantitative easing (QE) in the United States.
Not only is the ECB’s US$5.6 trillion (RM21.87 trillion) balance sheet larger than the US Federal Reserve’s (Fed) US$4.4 trillion, it is, unlike the Fed’s, still growing.
The ECB also has to be wary of individual country risks as withdrawing stimulus may have differing impacts within the bloc.
Some factors explain the resilience of Italian bonds. Data suggests Asian investors are returning to European bond markets thanks to a strong economy and positive yields, while the increasing cost of dollar investments encourages a switch to eurozone assets.
The slow pace at which the ECB is set to run down its balance sheet — by letting its “stock” of bonds mature rather than selling them off — should also continue to support debt markets for some time after new asset purchases end.
In addition, the central bank plans to reinvest cash from maturing bonds back into debt markets, helping limit upward pressure on bond yields.
The ECB is estimated to hold up to 28 per cent of Italian government bonds. According to Capital Economics, a shortage of eligible bonds in the eurozone has forced the ECB to buy €15 billion extra of Italian debt since 2015 for the QE.