The uncertain political scenario that emerged from Italian ballot boxes yesterday (Monday) sparked market volatility, but the impact on OBGs has been limited, said bankers, adding that while peripherals could find the covered bond market closed to them, core issuers may be looking at opportunities towards the end of the week.

Beppe Grillo

The Italian general election on Sunday and Monday produced what many market participants had indicated would be the “worst scenario”: no party being able to gather enough votes to gain a clear majority in both the lower and upper houses of parliament.

While the leftist Democratic Party (PD) was able to obtain a majority in the lower house – helped by a majority bonus the Italian electoral system assigns to the party that gets the simple majority of votes – it was not able to gain an absolute majority in the Senate, even via an alliance with the party of outgoing technocrat prime minister Mario Monti.

Uncertainty as to whether and how a new government will be formed, coupled with the high amount of votes obtained by the anti-austerity and anti-establishment party of comedian and blogger Beppe Grillo, prompted market volatility.

Market reactions included a widening of some 30bp in Italian sovereign bonds, falls in European stock markets, and the spreading of a general risk-averse mode, said syndicate bankers.

A Eu8.75bn BOT (six month Italian government bond) issue was trading some 50bp wider in comparison to previous issuance, said a syndicate banker.

A longer dated government bond issue will be launched tomorrow, a Eu4bn 10 year deal, he said, with the probability of spread levels rising even more.

“But I don’t forecast any size problems,” he said. “At the end of the day, they will be offering an attractive spread, so investor demand will be there.”

The differential between Italian and German government bonds reportedly touched 347bp, not as high as the peak it reached before former prime minister Silvio Berlusconi stepped down in November 2011, but up from levels it had been oscillating within during Monti’s term.

Despite the rise in BTPs levels, the impact of the electoral outcome on Italian covered bonds was modest, according to syndicate bankers, who said that a widening of OBGs was limited to 5bp-10bp.

A syndicate banker said that the move was a “natural consequence” of the widening of the Italian sovereign, and it was not driven by an increase in investor selling off their OBGs.

“Our traders have not received many requests for bids from investors wanting to get out of OBGs,” said the banker.

Another syndicate banker said that the limited impact of the elections on the Italian covered bond market was caused by the lack of OBGs supply and subdued activity in the secondary market.

“There is limited availability of long dated OBGs, so investors are not looking to sell what they have,” he said. “Moreover, there is not much movement in the secondary market today.”

An Italian portfolio manager told The Covered Bond Report that the elections were expected to bring about volatility in government spread levels, but not in covered bonds, and that OBGs would also possibly benefit from a widening of BTPs

“Investors are always keen to put their hands on OBGs as there is so little paper around, “ he said, “the secondary market is absolutely illiquid, and recent transactions have been placed well below BTPs,” he said.

Covered bond deals issued from the second half of last year by national champions such as Intesa Sanpaolo and UniCredit were priced some 50bp-100bp inside the Italian government bond curve.

Cédulas were also said by syndicate bankers to have suffered some minor spill-over effects of the Italian sovereign bonds onto Spanish ones.

“It’s the same story of peripherals,” said a syndicate banker. “Despite an improved sentiment towards them in January, the problems are still there.”

However, he added that he expects market turmoil to last only today and tomorrow (Wednesday), and a possible recovery to start already on Thursday, prompting issuance from core jurisdiction such as Germany or the Nordics, which could benefit from investors’ renewed preference towards “safe havens”.

“Peripheral issuers are now obviously at a stand,” he said. “But some strong names who have not yet tapped the covered bond market this year were looking at it before the elections results.

“They might be now waiting to see and seize market opportunities if they arise later this week.”

An European Financial Stability Facility benchmark three year euro issue had been put on hold before the announcement of the Italian elections, said the syndicate banker, but the transaction went live this morning, trading in sub-Libor territory, attracting a consistent level of demand and testifying the resilience of the euro market, he added.