Bumper Italian retail bond sale eases funding pressures

By Valentina Za

MILAN, Nov 5 (Reuters) - Italy raised almost 17 billion euros from the first day of sales of a new government bond tied to inflation targetted at small investors, giving it more leeway to reduce its international borrowing for the rest of the year.

Analysts and the Treasury had mooted a sale of just 10 billion euros of the paper and officials said they would halt the deal at 1300 local time on Wednesday, less than two days into a marketing push that could have lasted up to four days.

It looked set to be the biggest single debt sale by a European government ever and was the latest sign of the strength of the finances of households and the private sector in Italy, where very low debt contrasts with a heavily indebted state.

By the close of play on Tuesday, the Treasury had received orders for 16.8 billion euros of the bonds, all of which will be satisfied. Analysts said it was now likely to cancel its mid-December bond sales.

"(Even) with 15 billion euros, for instance, they will be able to reduce the size of the auctions significantly for the rest of the year," UniCredit strategist Luca Cazzulani said.

A similar sale a year ago brought a record of 18 billion euros into the Treasury.

Foreign institutional clients took 12 percent of a similar bond sold in April for 17 billion euros. Traders said financial institutions were weighing in also this time - a sign of the improvement in Italy's situation since worries about its finances deepened the euro zone's debt crisis last year.

"Such high demand likely points to a robust take-up by institutional players, including foreign ones," said ING strategist Alessandro Giansanti.

The new "BTP Italia" bond hit the market after data last week showed a sharp slowdown in Italian inflation. But a real yield of at least 2.15 percent proved attractive for institutional buyers, defying expectations of subdued demand amid weak consumer prices.

That return was higher than that for conventional Italian inflation-linked bonds sold to institutional investors for trade on international markets.

"Given a real yield of 1.66 percent for Italy's Sept. 2017 regular linker it's clear that the retail bond can be attractive also for institutional investors," Intesa Sanpaolo strategist Chiara Manenti said.

A minimum real yield of 2.15 percent means the new BTP Italia only needs inflation to be around 0.35 percent to match the return of the corresponding nominal bond.

Italy's annual inflation rate slowed to a four-year low of 0.7 percent in October. The Treasury will set the final real coupon of the BTP Italia at the end of the offer.

INVESTOR BASE

First launched in March 2012 to help Italy cope with foreign investors' reluctance to hold its debt in the face of a hump in its refinancing needs, BTP Italia bonds have reaped 44 billion euros over the previous five issues.

They are designed to appeal to Italy's wealthy savers as the Treasury seeks to diversify its investor base.

"It is good that they found a succesful way to tap small savers because Italian banks may be less able to buy domestic bonds as they repay longer-term funds to the European Central Bank and come under close scrutiny by it," Giansanti said.

Italian banks are seen less likely to support the Treasury's funding efforts in the future.

The state has raised 89 percent of around 470 billion euros it needs this year after selling 18.4 billion euros in debt last week.