ROUNDUP: Italy Referendum May Provide BTP Dip-Buying Opportunity
(Bloomberg) -- Analysts are warning that markets are too complacent on Italy’s political risk ahead of the constitutional referendum due later this year, but investors see the vote as a buy-on-dip opportunity for BTPs.
- Chances of Italy issuing a 50-year bond amid the increasing political risk are in place
- UniCredit sees the week of Sept. 19 as a “window of opportunity” for the bond sale; Natixis sees risk of the Treasury receiving a poor response, while Vanguard expects any 50-year to meet market interest
- There are signs of complacency in the market: 10Y BTP yield has fallen ~40bps since the Brexit vote to 1.16% while the cost of hedging against any EUR fallout using structures expiring around the Italian referendum (expected in late November or early December) remains near year-to-date lows
- Morgan Stanley
- Italian bonds, European equities underprice the risk of Italy’s upcoming constitutional referendum, analysts and economists including Daniele Antonucci write in a research note
- Assigns a 35% chance to the ‘Yes’ camp winning the referendum
- Sees markets too complacent about the vote outcome and its impact; govt losing the referendum would further delay urgently needed economic and banking reforms that have proved difficult even under Prime Minister Renzi’s pro-business agenda
- SPGBs, EU credit and EUR are pricing the risk more fairly compared to govt bonds and equities
- Advises selling BTPs vs USTs, selling EU stocks vs U.S. counterparts and buying 3m vs 12m volatility in EuroStoxx as too little political uncertainty is priced in
- Natixis
- A “No” vote at the referendum is not priced into market and may lead to a BTP spread widening, strategist Cyril Regnat writes in e-mailed comments
- There would be a bear-steepening of the curve starting on 5-year tenor with the worst on 30-year
- First target at 160bps on a “No” vote and with Renzi leaving
- In event of snap elections and M5S winning, a level between 2% and 2.5% for the 10Y BTP wouldn’t be surprising with Spain about 50bps below
- Given the prospect of increased political uncertainty, it would probably be more convenient for Italy to keep issuing 30-year bonds ahead of the referendum instead of selling a 50-year bonds
- Commerzbank
- The importance of the referendum is underpriced, but thanks to the ECB’s very aggressive stance, any fallout should be contained medium-term even in the case of a negative outcome that is still likely to cause near-term pressure, strategist David Schnautz says in e-mailed comments
- Says Italy’s referendum is among the reasons to keep a cautious stance on peripherals in general at this juncture; still, likes spread exposure medium to long- term
- Favors standing ready to use a referendum-induced setback as a buying opportunity for benefiting from an ongoing hunt-for-yield environment
- Goldman Sachs
- Assigns a 40% probability to the constitutional reforms being rejected, analysts including Francesco Garzarelli write in research note
- With a low likelihood of early elections even if the ‘No’ camp wins, and with Bank of Italy buying bonds, doesn’t see scope for a material widening in BTP spreads
- Italian sovereign bonds to trade above Spain’s unless any change in opinion polls suggesting the ‘Vote Yes’ camp is gaining ground ahead of Italy’s vote on constitutional reform this year
- Vanguard
- Any selloff in BTPs in the aftermath of Italy’s constitutional referendum would offer an opportunity to reset long positions into peripheral euro government bonds, Nick Eisinger, London-based strategist says in phone interview
- Favors Italian vs Spanish bonds as BTP market offers better liquidity and has a more developed futures market
- Doesn’t see the referendum leading to any systemic issue for Italy as investors are getting used to dealing with the political uncertainty
- Says Italy would be in “good company” if it issues ultra-long debt, as Spain did the same last May before holding general elections in June; any 50-year bond issuance from Italy would probably meet good demand from investors
- Investec Wealth & Investment
- Spreads are likely to be range-bound until we have clarity on the outcome of the vote as there is some complacency currently in the market, Shilen Shah, bond strategist, says in e-mailed comments
- Fund has limited exposure; however, a spike wider would be a buying opportunity depending on the fallout
- Pioneer
- Fund took profit on a long Italy trade opened after Brexit; now neutral on the country, planning to go into the last quarter of the year with a neutral stance on peripherals given rising political risk in the area, head of government bonds Cosimo Marasciulo says in phone interview
- Fund is in favor of increasing Italy duration risk while not boosting country risk; would consider taking part in Italy 50-year bond offer
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers UCG IM (UniCredit SpA)
People Cosimo Marasciulo (Pioneer Investment Management Ltd/Dublin)
Cyril Regnat (Natixis SA)
Daniele Antonucci (Morgan Stanley)
David Schnautz (Commerzbank AG)
Francesco Garzarelli (Goldman Sachs Group Inc/The)
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