Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Biggest Japan buying of Italian bonds since 2014
Christopher Dembik
Head of Macroeconomic Research
Summary: Japanese investors bought into Italian government debt in a big way in June, increasing their portfolio holding by 327bn JPY, which is the largest net monthly increase since 2014.
Japanese investors bought into Italian government debt in a big way in June according to the latest figures released by the Japanese government. They increased their portfolio holding by 327bn JPY (roughly 2.6bn euros), which is the largest net monthly increase since the series began five years ago.
The Italian bond market remains attractive for investors. As a matter of fact, the risk of Italy leaving the EU is extremely low. Based on July Sentix survey of 1000 investors, only 4% of institutional investors and 9% of private investors consider that there is a real risk of Italexit within one year. In other words, the risk is virtually close to zero. Adding to that expectations of further ECB stimulus from September, it is not surprising to see the yields spread between Italy and Germany 10-year bonds narrowing to below 200 bps.
In addition, the search for yield in the low interest rate environment coupled with rotation out of German bunds have benefited to Italy. Contrary to many other European countries where the yield curve is negative up to 30 years for Germany or 50 years for Switzerland, it is only negative up to one year for Italy. The 2-year yield is at 0.15% and the 10-year yield at 1.45%.
The next release of purchases by the Japanese government will be on September 9th. We expect that some of the positive flows we have noticed in June should be reversed in coming months due to political tensions within the governing coalition and uncertainty about the Italian budget.
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