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The Italian (Bond) Job

Italy's disappointing bond sale

Image source: Ekaterina Iatcenko, Africa Studio - Shutterstock

What's going on?

The Italian government tried to shift some bonds this week, but it didn’t go as well as hoped…

What does this mean?

When governments sell bonds, two of the main types of investors they target are institutions (like those managing pension funds) and private individuals (a.k.a. retail investors). This week’s bond sale, specifically aimed at the latter, was the first since Italy’s new government started rocking the market boat back in May. A few years ago, similar sales raised $25 billion for the country; but this week’s only managed $2.5 billion, with a paltry $985 million coming from retail investors.

Heavily indebted Italy is piling on more to fund its ambitious spending plans – and the European Union is preparing to respond with sanctions, as the plans go against eurozone rules. With Italian banks already up to the eyeballs in the country’s bonds, and overseas investors (perhaps understandably) wary, Italy’s government had hoped that patriotic retail investors would come through – but it wasn’t to be.

Why should I care?

For you personally: Investing in some governments’ bonds can be risky.

If you’re a retail investor who owns Italian bonds, then you should be watching its economy closely. If Brussels is right, and Rome’s overstretching its purse strings, the government may end up defaulting on its debt – meaning you might not get paid back. Unlike in the US and UK, euro-using Italy’s central bank can’t just print extra money if push comes to shove.

For markets: Italy is still a bit of a thorny issue.

Institutions appear more comfortable than retail investors with the risks involved: they spent more on the new bonds, as well as sending pre-existing Italian bond yields lower on Thursday (remember, greater demand for bonds sends their prices higher and yield lower). Some think the Italian government may end up changing its spending plans in the face of mounting pressure. But if investors were really positive, then they’d be buying shares of the bond-laden Italian banks, too…

Originally posted as part of the Finimize daily email.

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