* Italy draws $12.1 billion of demand for U.S. dollar bonds<\/p>\n
* Markets subdued before U.S. Federal Reserve meeting (Recasts, adds details, updates prices)<\/p>\n
April 27 (Reuters) – Italy received $12.1 billion of investor demand for its latest U.S. dollar bond sale on Tuesday, according to a lead manager, a day after its benchmark yield hit a seven-month high.<\/p>\n
Rome, which has been diversifying its funding sources after a sharp rise in borrowing needs due to the coronavirus pandemic, is selling three- and 30-year U.S. dollar bonds via a syndicate of banks.<\/p>\n
Analysts at Commerzbank expect the bonds will raise $5.5 billion.<\/p>\n
It is Italy\u2019s third venture into this market after it launched its first dollar issuance since 2010 in October 2019. That has helped it build a yield curve in U.S. dollars, with today\u2019s sale adding to five-, 10- and 30-year bonds issued since.<\/p>\n
Italy managed to cut the yield it is offering on both tranches, with the shorter bond receiving $6.6 billion euros of demand and the longer $5.5 billion, according to the lead manager, though the yields Italy will pay were cut by less than on past dollar deals.<\/p>\n
\u201cIt hasn\u2019t tightened as much from initial (price) guidance as I would have expected,\u201d said Peter McCallum, rates strategist at Mizuho.<\/p>\n
\u201cSome of that might be the fact that it\u2019s not too attractive … when swapped back into euros compared to existing BTPs,\u201d he added.<\/p>\n
Analysts said that for the 30-year bond, that may also reflect greater anxiety around rates volatility in the United States.<\/p>\n
Italy also raised 5.5 billion euros in an auction of a short-term and inflation-linked bonds.<\/p>\n
The issuance comes as Italian bond yields face upward pressure, given uncertainty over the pace of the European Central Bank\u2019s bond buying, which holds down borrowing costs, and a budget deficit set to surge to a 20-year high.<\/p>\n
On Tuesday, the 10-year yield rose 2 basis points to 0.82% after rising to its highest since October 2020 on Monday.<\/p>\n
Still, positive momentum building around Italy\u2019s recovery prospects supported the issuance. Italy unveiled a 222 billion euro economic recovery plan on Monday, after reaching a deal with the European Commission on the use of its recovery fund.<\/p>\n
Ratings agency S&P affirmed Italy\u2019s BBB rating – the highest among the main rating agencies – with a stable outlook last week, citing the fiscal stimulus and accelerated vaccinations.<\/p>\n
\u201cWe\u2019ve been adding a little bit of (additional exposure to) Italy,\u201d said Gareth Hill, fund manager at Royal London Asset Management.<\/p>\n
\u201cThe backdrop of having a safer pair of hands in (Prime Minister Mario) Draghi now means that we\u2019re perhaps more comfortable from a fundamental perspective in Italy,\u201d he said.<\/p>\n
Broadly, there was little clear market direction ahead of the U.S. Federal Reserve meeting starting on Tuesday, with Germany\u2019s 10-year yield, the benchmark for the euro area, unchanged at -0.25%.<\/p>\n