Italy Enjoys the 'Draghi Effect'

Record High 10-Year Bond Auction at 110 Billion Euros... Yield Gap with German Bonds Narrows to 0.89%P

Mario Draghi, Prime Minister of Italy [Photo by EPA Yonhap News]

[Asia Economy Reporter Park Byung-hee] Italian Prime Minister Mario Draghi made a spectacular debut in the bond market. Large-scale buy orders emerged in the first Italian government bond auction held after Draghi took office. On the 16th (local time), the Italian government conducted an auction of 10-year government bonds worth 10 billion euros. As soon as the auction began, funds started pouring in, and at one point, the bid amount exceeded a record high of 110 billion euros.

Bloomberg reported that investors poured in massive amounts of money, showing confidence in Prime Minister Draghi.

In fact, the Italian Parliament plans to hold a confidence vote on the Draghi cabinet on the 17th. It is merely a formal procedure. Major Italian political parties, including the two main parties in the Italian Parliament?the Five Star Movement (M5S) and Lega?as well as the Democratic Party (PD), Italia Viva (IV), Forza Italia (FI), and Liberi e Uguali (LeU), have declared their support for Prime Minister Draghi regardless of left-right political lines. These parties hold more than 90% of the total seats in the Italian Parliament.

Thanks to the large-scale buying spree, the Italian government reduced its interest cost burden. The winning bid yield was set at 0.60%. This was 0.04 percentage points higher than the yield on currently traded 10-year Italian government bonds. The yield was set lower than the market expectation, which initially predicted it would be 0.08 percentage points higher.

As the winning bid yield was formed lower than expected, some investors canceled their bids, and the final bid amount decreased to 65 billion euros. The Italian government also conducted an auction of 30-year inflation-linked bonds. For the 4 billion euro auction, more than 16.6 billion euros in funds poured in.

The financial market had already shown a positive response since Draghi emerged as the prime minister candidate. This was because Draghi had actively responded to the European debt crisis during his eight years as President of the European Central Bank (ECB). At that time, Draghi earned the nickname "Super Mario."

Prime Minister Draghi officially took office on the 13th, and prior to that, the yield on 10-year Italian government bonds hit a record low, closing at 0.46% on the 11th.

Antoni Bubbet, Senior Investment Strategist at ING, said, "The market can enjoy surfing the waves created by Draghi for a while," adding, "The Draghi effect is strongly driving demand for Italian government bonds." Bubbet also predicted that the spread between Italian and German government bond yields would narrow to 0.75 percentage points within six months.

Last year, as COVID-19 spread, the yield spread between 10-year German and Italian government bonds widened to as much as 2.75 percentage points but has now narrowed to 0.89 percentage points. The narrowing of the yield spread with German government bonds, considered a safe asset, means that Italian government bonds are also being recognized as safe assets.

Luca Cazzulani, Investment Strategist at UniCredit, also expects Draghi to successfully lead Italy's structural reforms by securing the COVID-19 recovery fund from the European Union (EU) Commission and to reduce Italy's political instability, forecasting the yield spread to narrow to 0.75 percentage points. Cazzulani predicted that if Draghi achieves the so-called Super Mario scenario by delivering results beyond expectations, the yield spread between German and Italian government bonds could narrow to 0.50 percentage points. The last time the spread between German and Italian government bond yields narrowed to 0.50 percentage points was just before the global financial crisis in 2008.

This content was produced with the assistance of AI translation services.