Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Fixed Income Strategy
Summary: In order to understand whether it makes sense for Italy to access the European Stability Mechanism (ESM) it is necessary to understand what will be the country's cost of borrowing through the ESM versus its actual cost of funding.
On Monday the ESM has issued EUR 7bn 12-months Bills at a yield of -0.432% [1]. One day later, Italy issued EUR 7bn BOT with 12 months maturity at an average yield of 0.238% [2]. Therefore, ESM’s cost of funding is 67bps cheaper than Italy’s. However this advantage tightens up as we add ESM’s various fees.
The ESM, on the top of the base rate which reflects the ESM’s cost of funding, charges the borrower the followings [3]:
Therefore, the advantage to borrow from the ESM against issuing BOTs ends up to be only of 27bps, bringing the borrowing cost around zero of a county that already can raise capital without issues at a very low interest rate.
Besides saving up a ridiculously small amount of money, the borrowing country has to accept the followings: