2017
INDEX
I. DEBT MANAGEMENT OBJECTIVES FOR 2017 ...... 1 I.1 Treasury's objectives and international debt management practice ...... 1 I.2 The institutional framework ...... 4 I.3 Curbing debt cost while paying attention to cost/risk profile ...... 8 I.4 Monitoring and managing the Cash Account to stabilise the balance...... 18
II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK ...... 21 II.1 Monetary policy and the euro area money market ...... 21 II.2 Euro area bond markets ...... 24 II.3 Trends in the Italian government bond market ...... 28
III. PUBLIC DEBT MANAGEMENT IN 2017 ...... 51 III.1 General government debt’s outstanding amount ...... 51 III.2 Activity in government securities ...... 52 III.3 Derivatives portfolio management ...... 79 III.4 Debt management results compared to goals ...... 81 III.5 Treasury cash management ...... 92
ANNEXES ...... 101 Organisational Structure of the Public Debt Directorate at Treasury Department ...... 101 Statistical annexes ...... 104
MINISTRY OF ECONOMY AND FINANCE III 2017 PUBLIC DEBT REPORT
INDEX OF TABLES
Table I.1: Domestic government securities Table III.1: Issues, maturities and funding of Central Government borrowing requirement (€ million) Table III.2 Government securities issued net of debt exchange operations (€ million) Table III.3.a: Debt exchange electronic transaction of 3/17/2017 (€ million) Table III.3.b: Debt exchange electronic transaction of 7/7/2017 (€ million) Table III.3.c: Debt exchange electronic transaction of 10/04/2017 (€ million) Table III.3.d: Debt exchange electronic transaction of 11/17/2017 (€ million) Table III.3.e: Debt exchange electronic transaction of 12/15/2017 (€ million) Table III.4: Debt exchange transaction of 5/25/2017 (€ million) Table III.5: Summary of 2017 buyback transactions (nominal amounts, € million) Table III.6.a: Composition of 2015-2017 issues in absolute and percentage value net of debt exchanges Table III.6.b: Composition of 2015-2017 issues in absolute and percentage value gross of debt exchanges Table III.7: Average life of government bonds stock (years) Table III.8: Duration and ARP trend 2015-2017 for the government bonds stock, before derivatives (years) Table III.9: Duration and ARP trend 2015-2017 for government bonds, after derivatives (years) Table III.10: Market value trend of government bonds stock (€ million) Table III.11: Derivative instruments portfolio - 2016 and 2017 (€ million) Table III.12; Cash Account balances and placements of Treasury liquidity at month- end – 2017 (€ million)
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INDEX OF CHARTS
Chart I.1: Annual profile of maturities - medium-long term securities outstanding as at 31-12-2016 (€ million) Chart I.2: Monthly profile of maturities – medium-long term securities outstanding as at 31-12-2016 (€ million) Chart I.3: Issuance portfolios analysed for 2017 Chart II.1: Interest rate corridor of the ECB monetary policy 2015-17 (percentage values) Chart II.2: Performance of the main money market rates in 2017 (percentage values) Chart II.3: Trend of European government bond yields - 10 years maturity (percentage values) Figure 1: Net monthly purchases under the APP programs Chart II.4: Market rates on government bonds - 2-3-5-10-15-30-50 years (percentage values) Chart II.5: Yield spread between 10-year and 2-year bonds (basis points) Chart II.6: Yield differential between 30-year and 10-year maturity bonds (basis points) Chart II.7: Yield differential between 50-year and 30-year maturity bonds (basis points) Chart II.8: BTP-Bund, OAT-Bund and Bonos-Bund spread - 10-year benchmark (basis points) Chart II.9: Yield curve in secondary market Chart II.10: Monthly traded volumes on the MTS platform (€ million) Chart II.11: Quarterly traded volumes on MTS, by segment (€ million) Chart II.12: Monthly traded volumes on the MTS platform by maturity (€ million) Chart II.13.a: Bid/ask spread in basis points on 10, 15, 20, 30 and 50 years benchmark BTP, recorded on the MTS platform Chart II.13.b: Bid/ask spread in basis points on CTZ, CCTeu, BTP 3, 5 and 7 years benchmark, recorded on the MTS platform Chart II.13.c: Bid/ask spread in basis points on benchmark 5 and 10 year BTP€i, as recorded on the MTS platform Chart II.13.d: Daily slope on 10 years benchmark BTP (logarithmic scale) recorded on the MTS platform Chart II.14: Monthly traded volumes on the MTS platform by contract maturity (€ million) Chart II.15: Annual volumes traded by Specialists on MTS platform (%) Chart II.16: Monthly volumes traded by Specialists on platforms other than MTS (€ millions) Chart II.17: Quarterly volumes traded by Specialists by type of counterparty (€ million) – Fund managers, Banks, Pension and Insurance Funds, Hedge Funds
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Chart II.18: Quarterly volumes traded by Specialists by geographical location of the counterparty (€ million) Chart II.19: Price trend of BTP Future and BTP benchmark with 10 years maturity (right-hand reversed scale in%) Chart II.20: Traded amounts and open interest of the BTP Future contract negotiated on the 10-year maturity on the Eurex market Chart II.21: Price trend of CDS ($) on Italian debt at 5 years maturity and of the 5 years BTP-Bund spread (basis points) Chart III.1: Trend of debt-to-GDP ratio Chart III.2: Yields at auction of 6- and 12-m BOTs (percentage points) Chart III.3: 6-m BOTs simple yield and 6-m Euribor Chart III.4: Yields at issuance on CTZs in 2017 (percentage rates) Chart III.5: BTP September 1, 2033 - distribution by type of investor Chart III.6: BTP September 1, 2033 - distribution by geographical area Chart III.7: BTP March 1, 2048 - distribution by type of investor Chart III.8: BTP March 1, 2048 - distribution by geographical area Chart III.9: Yields at 2017 auctions for BTPs maturing between 3 and 10 years (percentages) Chart III.10: Yields at 2017 auctions for long term BTPs (percentages) Figure 2: Composition by type of counterparty of orders placed in the nominal BTPs auctions by government bond Specialists - 2016-2017 Figure 3: Composition by geographic area of orders placed in the nominal BTPs auctions by government bond Specialists - 2016-2017 Chart III.11: Real yields at 2017 BTP€is issuances (percentages) Chart III.12: BTP€i May 15, 2028 - distribution by type of investor Chart III.13: BTP€i May 15, 2028 - distribution by geographical area Chart III.14: Yields at 2017 issuances on CCTeus (percentages) Chart III.15: Amount repurchased in extraordinary transactions – 2013 to 2017 (nominal amounts, € million) Chart III.16: Composition of government bond stock at December 31, 2016 and at December 31, 2017 Chart III.17: Evolution in structure and average life of domestic debt, 1993 to 2017 Chart III.18: Maturities for residual life classes 2015 to 2017 Chart III.19: Euro swap rates and Italian government bonds yield curves Chart III.20: Expected evolution in notional amount of the derivatives portfolio if swaptions are exercised (€ million) Chart III.21: Structure by maturity of the derivatives portfolio if swaptions are exercised (€ million) Chart III.22: Average cost at issuance of government securities –2005 to 2017 Chart III.23: Average cost of government bonds stock, before and after derivatives – 2005 to 2017 Chart III. 24: 2017 average intra-monthly variations in Treasury liquidity: deviations from the monthly low (€ million)
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Chart III.25: Gap between the monthly high and low of Treasury available cash 2016- 17 (€ million) Chart III.26: Average use at daily OPTES auctions (€ million) Chart III.27: Overnight rates trend on the money market and at OPTES auctions – 2014 to 2017 (percentage rates) Chart III.28: Average lending at daily OPTES auctions – 2014 to 2017 (€ million) Chart III.29: Average liquidity distribution by type of placement – 2017 (€ million and percentage rates)
MINISTRY OF ECONOMY AND FINANCE VII 2017 PUBLIC DEBT REPORT
VIII MINISTRY OF ECONOMY AND FINANCE
I. DEBT MANAGEMENT OBJECTIVES FOR 2017
I.1 TREASURY'S OBJECTIVES AND INTERNATIONAL DEBT MANAGEMENT PRACTICE
Debt management objectives and risks in the international practice As already mentioned in previous editions of this report, Treasury's public debt management is in line with international best practices, therefore fully matching main multilateral financial institutions recommendations and practices followed by Debt Management Offices (DMOs) in advanced countries. The international best practices have developed over time1, thanks to sharing and analysis of experiences in wholly different economic and legal contexts. They are grounded upon unanimous recognition of an inverse relationship between debt cost and risk (both refinancing and interest rate risk) and define the main debt management goals as based on the need to: cover Central Government’s funding needs; minimize funding costs subject to keeping risks at levels that - in a medium to long term view2 - may be considered as acceptable; maintain access to domestic and international markets in a long-term perspective. The relationship between debt cost minimization and control of the risks arising from the debt structure should be assessed in the context of public finance. Indeed, public finance requires the highest degree of predictability of budget items, in order to curb the risk of having to suddenly resort to significant fiscal measures to cope with unforeseen expenses (in practice, the bigger the size and the more sudden the need, the less actually feasible the necessary fiscal effort). This is why the international best practices, although aware of a generally heavier burden of fixed-rate long-term debt, consider debt structures excessively relying on short maturities or floating rate instruments as a substantial factor in
1 By way of example, the first 2-volume edition of the OECD's Green Books on Government Debt Management was published in 1983. Further updates followed in 1993, 2002 and 2005. The various editions of the Guidelines for Public Debt are still an important reference jointly drawn up by the World Bank and the International Monetary Fund, the last of which was edited in 2014 and published in 2015 (see text at: http://www.worldbank.org/content/dam/Worldbank/document/Debt/Revised%20Guidelines%20for%20Public%20 Debt%20Management%202014_v2.pdf). 2 The most recent edition of the guidelines of the International Monetary Fund and the World Bank on public debt management states (page 17 of the text referred to in the link above): “The main objective of public debt management is to ensure that government funding needs and its payment obligations are met at the lower possible cost over the medium to long term, consistent with a prudent degree of risk” and “Governments should try to minimize expected debt servicing costs... subject to an acceptable level of risk, over a medium - to long- term horizon”.
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increasing a country's vulnerability3. Indeed, these structures – notably at a time of declining interest rates - may seem (apparently) desirable to reduce debt servicing cost (and therefore deficit) in the short term, but they imply a substantial increase in interest expenditure volatility and in market risks inherent in the debt portfolio and therefore in public finance. Main types of risk faced by the DMOs are typically market risks and include interest and exchange rate risks, refinancing, liquidity, credit and operational risks. As can be seen, the various risks mostly point, albeit in different ways, to a concern that a sudden rise in debt cost could make it unsustainable. Therefore, the exposure of a public debt portfolio to the aforementioned risks depends on the composition of the portfolio itself, notably on the shares of short-term vs mid-long-term, fixed-rate vs floating-rate as well domestic- vs foreign-currency denominated debt. Availability and support of a broad, deep and liquid market for government securities’ placement and trading are further key risk issues to be taken into account. Under the financial markets typically prevailing conditions, and regardless of the creditworthiness of a single issuer, debt cost is higher for longer maturities, which in turn reduce the refinancing and interest rate risks. Thus, as regards debt’s interest rate type and tenor, the most prudent choice is generally more expensive, while the less expensive one exposes the borrower to greater risks. As DMOs are required to reduce debt cost while at the same time curbing market risks, they will therefore have to deal with a trade-off, selecting, among available options, the cost-risk combination that is deemed satisfactory4 with regard to the features of the portfolio and the overall strategies. This trade-off is not chosen according to invariable criteria, valid to all DMOs; on the contrary, it is defined by the DMOs of all countries according to the distinguishing features of their own portfolio, of the markets they are dealing with and of the pursued fiscal policies: in Italy, orientation has been of a particularly prudential nature due to the size of the debt (the third in the world in absolute value), which does not allow opportunistic tactics, but must favour continuity, predictability and long-term strategies. Of course, the task of curbing debt cost subject to an acceptable level of underlying risk – assigned to DMOs - is not limited to the issuance time and to market conditions prevailing at that time, but involves an ongoing action even after issuance, taking into account market developments.
The Treasury in International Forums on Debt Management As above mentioned, international best practices were born thanks to an ongoing sharing of experience among DMOs and other involved stakeholders or institutions. Identifying and calibrating Treasury’s objectives benefits from regular
3 Brief considerations on this subject can be found in the Guide to the Debt Management Performance Assessment (DeMPA) Tool, World Bank 2009. 4 On this point, the International Monetary Fund and the World Bank guidelines observe that "Minimizing cost, while ignoring risk, should not be an objective. Transactions that appear to lower debt servicing costs often embody significant risks for the government and can limit its ability to repay lenders. Managing cost and risk therefore involves a trade-off”.
2 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
international coordination with relevant foreign and supranational institutions, as well as from steady exchanges with international institutional investors and rating agencies. Below are the main ways in which the Treasury participates in the international debate about public debt management related issues: Steady relations with European DMOs are ensured through the relevant Sub- Committee (European Sovereign Debt Markets – ESDM) of the EU Economic and Financial Committee, which is a consultative body to the EU Commission and the EU Council in charge of defining coordination actions of Member States' economic and financial policies. Regular attendance of working groups of supranational institutions such as OECD, IMF and World Bank is ensured. The Treasury also participates in the OECD Working Party on Public Debt Management (WPDM)5, a stable forum for sharing information about public debt management policies and techniques among OECD’s member countries, as well as in the Government Borrowers’ Forum annually organized by the World Bank to share actual experiences among the approximately 40 participating countries. An implicit recognition of the Italian Treasury's standing in government debt management is provided by the Public Debt Management Network6, a joint initiative promoted by OECD, World Bank and Italian Treasury (as the only State institution alongside the two multilateral ones) which aims to share knowledge and information about public debt management issues. Another key institutional coordination opportunity is the participation in Eurostat statistical working groups and the involvement in drafting half-yearly notifications under the Excessive Deficit Procedure (EDP), notably about correct recording of items directly related to public debt according to European national accounting standards (ESA). Monitoring these accounting aspects allows taking in account each relevant profile, other than general issues about financials and direct impact on public finance. Lastly, the Treasury participates in the annual meetings of the International Retail Debt Management Conference, gathering DMOs of a small number of countries and specifically intended to deal with operational issues concerning the placement of government bonds with non-institutional investors. The Conference also benefits, every second year, from the collaboration of the World Bank for a wider debate extended to emerging countries.
The organizational model adopted by the Treasury for setting debt management objectives The Second Directorate at the Treasury Department is responsible for managing public debt. The Directorate includes the typical functions of financial market operators, which also characterize DMOs in advanced countries, i.e. Front, Middle and Back
5 The WPDM started its meetings as a working group involving public debt management experts at the OECD in 1979. The Treasury has continuously contributed to the annual work of the WPDM since 1985 and is part of the Steering Group set up in 2003. Currently, the WPDM’s meetings gather the DMOs of all 37 OECD countries as well as - as observers - the International Monetary Fund, the World Bank and the European Commission. 6 See www.publicdebtnet.org
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Office functions. Other functions include delivering legal documentation, communication, statistics, relations with external institutions, as well as IT activities and all other legal, administrative and accounting functions typical of a ministerial structure. A brief explanatory note of these functions and activities, coupled with a chart of the organizational structure of the Directorate, is attached to this Report. Debt management objectives are identified and monitored by offices in charge of the Middle Office functions. These include: a) analyses, allowing to identify the cost/risk framework that will delimit operations and to define the most suitable issuance and hedging strategies; b) multi-annual forecasts on government interest spending and debt levels, to underlay planning documents and institutional reporting7; c) monitoring of counterparty risk, which determines certain constraints to be met in managing derivatives and for cash management purposes8.
I.2 THE INSTITUTIONAL FRAMEWORK
General Government debt encompasses consolidated gross liabilities of all public administrations (Central Government, Local Authorities and public Social Security institutions), while a narrower concept coincides with the amount of outstanding government bonds, thus concerning only securities issued by the State, both on domestic and foreign markets. This Report, as in previous years9, refers to this second and narrower definition, which is moreover the scope of dedicated legislation, i.e. the Consolidated Public Debt Act10 (TUDP). As of 31 December 2017, government debt securities accounted for approximately 84,5% of total public debt. The main features of outstanding government securities - maturity, interest rate type, mode and frequency of issuance - are summarized in Table I.1.
7 In particular, the Economic and Financial Document (DEF) provided for by Law no. 39 of 7 April 2011 (where the contribution of the Public Debt Directorate is included in Part One "Stability Program" and Part Two "Public Finance Analysis and Trends"), the DEF Update, the Budget Programming Document (DPB) established by EU Regulation no. 473/2013, the Appendix to the so-called Quarterly Cash Report (referred to as the Report on the Consolidated Cash Account of the Public Administration following Article 14 of Law 196/2009), the Parliamentary Report on the Sinking Fund for Government bonds (attached to the General National Accounting Report) pursuant to Article 44, Paragraph 3 of Presidential Decree 398/2003, and the semi-annual report to the Court of Auditors on the management of public debt, established by the Ministerial Decree of 10/11/1995. 8 Front Office activities relate to debt issuance through domestic and foreign programs, short-term cash management, debt exchanges and buybacks as well as derivatives transactions. To these purposes, Front Office activities also include monitoring government bonds secondary markets as well as selecting and assessing Specialists in Government bonds. Back Office's role entails the preparation of issuance decrees, any other borrowing - related documentation - such as prospectuses for international issues (Global Bond, Medium Term Note) and for other securities to be placed with methods other than auction - and completion of derivatives. The Back Office also carries out payment execution. Other functions carried out by the Public Debt Management Directorate include activities that can be defined as communication tasks: real-time information on issuance activities; production of statistics about structure, dynamics and composition of government bonds and relevant market; production of statistics on debt monitoring and derivatives’ exposure of local entities. The Directorate also carries out any extraordinary transaction on local authorities’ debt, according to specific rules. 9 All annual issues of the Public Debt Report are available at: http://www.dt.tesoro.it/en/debito_pubblico/presentazioni_studi_relazioni/index.html 10 Consolidated Text of the legislative and regulatory provisions on public debt (Decree of the President of the Republic No. 398 of 30 December 2003).
4 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
TABLE I.1: DOMESTIC GOVERNMENT SECURITIES BOT CTZ CCT/CCTeu BTP BTP€i BTP Italia Treasury Bills Zero Coupon Treasury Treasury Bonds Treasury Treasury Bonds Treasury Certificates Bonds Indexed to bonds Indexed to Italian European Inflation Inflation Maturity 3, 6, 12 months 24 months 5, 7 years 3,5,7,10,15,20, 5,10,15 & 30 4,6 & 8 years and under 12 30 & 50 years years months (flexible BOTs) Remuneration Issued at a Issued at a Semi-annual Semi-annual Semi-annual Semi-annual discount discount floating coupons fixed coupons, coupons coupons indexed to the 6- possible issue indexed indexed to month BOT at a discount to European Italian inflation auction rate or to inflation (HICP (FOI index, net the 6-month index, net of of tobacco Euribor, possible tobacco products), issue at a products), semi-annual discount possible issue revaluation of at principal and a discount and loyalty bonus* revaluation of on maturity principal on maturity. Issuance Competitive Marginal Marginal Marginal Marginal Through the method auction on yield auction with auction with auction** with auction** MOT (Borsa discretionary discretionary discretionary with Italiana’s determination determination determination discretionary Electronic of price and of price and of price and determination Bond Market) quantity quantity issued quantity issued of price and issued quantity issued Issuance Monthly Monthly Monthly Monthly and Monthly One/two times a frequency based year on market conditions for 15-, 20-, 30- and 50- year BTPs *) For individual investors and other similar investors who buy the security at issuance during the first phase of the placement period. **) First tranches of new long-maturity BTPs (exceeding 10 years) or BTP€is may be offered on the market through a placement syndicate
Public debt management activity, as precisely regards tradable government securities, was carried out in accordance with the provisions of the Minister's policy statement (“Atto di indirizzo”), the General Directive on administration and management of Ministry of the Economy and Finance (MEF) and the Ministerial Decree (the so-called "Framework Decree"11 for 2017) which set the benchmarks for administrative activities concerning financial transactions related to public debt management. These provisions were then translated into operational goals in the "Public Debt Management Guidelines" for 2017 (hereinafter "the Guidelines"12). Also for 2017 - as was extensively explained in the first "Public Debt Report" of 2014 - the Minister’s policy statement included amongst political priorities the
11 Decree of 22 December 2016 published in the Official Gazette no. 304 of 30 December 2016. 12 Public Debt Guidelines are published on the MEF / Treasury Department's website at http://www.dt.tesoro.it/en/debito_pubblico/presentazioni_studi_relazioni/index.html
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continuation of "...the commitment to manage public debt with the aim of containing its cost and stabilizing or lengthening average maturity". The General Directive translated this policy priority into the two strategic objectives of curbing debt cost, while paying particular attention to its cost/risk profile, and monitoring and managing the Cash Account13, pursuing the stabilization of its balance. The 2017 Framework Decree, as in previous years, provided more details about operational tools that the Public Debt Directorate has been authorized to use to achieve its goals. In particular, Article 2 provides for the issuance of debt "in compliance with the annual threshold set up by the Law approving the national Budget", being sufficient to fund securities maturing in the year and Central Government’s borrowing requirement, taking care to "... reconcile the need to meet markets requirements with that of reducing the overall cost of debt in a medium to long-term perspective, considering the need to protect against refinancing risk and exposure to interest rate changes".
To this end, in the same article specific percentage quotas were defined for debt composition to be reached at the end of 2017, as follows: BOT (short-term securities) between 3% and 8% (unchanged compared to the previous year); BTP (“conventional” fixed-rate securities) between 60% and 75% (a range with a higher lower limit than the 55% to 75% range set for the previous year); CCT/CCTeu (“conventional” floating-rate securities) between 5% and 10% (unchanged from the previous year); CTZ no more than 4% (slightly lower than the limit of 5% set for previous year); BTP€i and BTP Italia (“linkers” securities) no more than 15% (unchanged from the previous year).
Furthermore, it was stipulated that the stock of securities issued on foreign markets would not exceed 5% of total outstanding securities by the end of 2017 (unchanged from the previous year). In order to pursue the "curbing of the overall debt cost, protection against market and refinancing risks and the proper functioning of government securities secondary market", Article 3 authorized, as in previous years, the use of debt restructuring on a consensual basis, i.e. buybacks, debt exchanges or early redemption of securities, as well as derivative transactions. To curb credit risk stemming from these last transactions, Article 4 of the Framework Decree has set out the credit policies to be applied to related counterparties, also allowing to put in place mutual guarantee agreements (collateral). Finally, with reference to the Cash Account, Article 6 of the Framework Decree states that it must be managed aiming at "an efficient movement of liquid assets, in relation to the government securities issuance strategy, prevailing market conditions and constraints imposed by monetary policy provisions". Rules
13 Information on the nature of the Cash Account and the context of related operations is provided in Section I.IV below.
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applicable to Treasury liquidity cashflows and counterparties selection are based on the ministerial decree of 25 October 2011. To sum up, the objectives set by the Framework Decree to public debt management activities in terms of "desired" composition by the end of 2017 were intended to favour medium to long-term maturities and to reduce short-term ones, in line14 with international best practices. The aim was to continue to reduce both interest rate and refinancing risk, keeping average life of government securities at least to the same level already achieved in 201615, in a generally less favorable market context than in the previous year. In the Guidelines for 2017, therefore, in full compliance with the above-mentioned measures, Treasury has specifically committed to the following: 1. set the maturities of the securities to be issued so as to allow average life of government bonds stock to remain at least at the same level; 2. moderately increase the BOTs supply, in light of the lower amount of maturities of this sector in 2017, without substantially altering its percentage compared to the previous year; 3. approach the market with a higher overall volumes of Eurozone-inflation indexed issues compared to 2016, with a diversified supply on all the main sectors and maturities, also including the potential launch of a new 10-year Eurozone-inflation indexed benchmark. As for the BTPs Italia, whose 2017 scheduled maturities exceeded € 39 billion, the aim was not only to re- propose two placements, but also to manage the substantial amount scheduled to come due through exchanges and buybacks, subject to a feasibility analysis; 4. supply CCTeus on a monthly basis, and for higher volumes than in 2016, also to take into account large scheduled maturities, without failing to reduce the exposure to interest rate risk; 5. as for nominal BTPs, increase volumes supplied on 3- and 5-year maturities, but with a slight increase of the 3-year maturity share of annual issues, keeping volumes of issues on 7- and 10-year maturities in line with those of 2016. On longer maturities, diversify the offer, also thanks to the introduction - in 2016 - of the two new 20- and 50- year maturities, by proposing from time to time the security showing deeper market and better quality of final demand; 6. carry out a substantial volume of debt exchanges and buybacks. The main aim was to manage the maturity profile scheduled in the 2018-2019 period (and in 2017 too, if possible), in order to facilitate debt stabilization and reduction, in line with public finance commitments; 7. as for derivatives, an active management of the existing transactions portfolio was expected, aimed at improving its performance in the current market context. Hedging any foreign-currency new issue through cross currency swaps was also allowed, in a context regulated by a bilateral guarantee agreement.
14 See I.1 above. 15 In 2015, the average life of the stock of Government bonds went from 6.38 to 6.52 years; in 2016 it reached 6.76 years.
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During 2017, as in previous years, the Public Debt Directorate was therefore required to ensure that issues needed to fund maturing securities redemption and Central Government borrowing requirements, and more generally all debt management activities, would be such as to curb debt cost, with a special focus on the main categories of risk to be kept under control, while at the same time helping to ensure adequate stability and predictability in the overall balance of the Cash Account.
I.3 CURBING DEBT COST WHILE PAYING ATTENTION TO COST/RISK PROFILE
The cost/risk trade-off: specific features of the Italian case The management of the above mentioned cost/risk tradeoff is underpinned by a previous analysis of various available debt issuance strategies, at first calculating their relevant cost in terms of debt servicing, which in turn depends on the interest rates at which securities are placed on the market. For each examined strategy, any entailed risk is also assessed; since these risks may take multiple forms, multiple measures are adopted16. As already reported in previous years' Reports, debt management in Italy has focused on two main risks: interest rate risk, in order to minimize the impact on debt burden of market interest rate changes; and refinancing risk, with the aim to allocate redemptions timetables more uniformly over time in order to facilitate new issuances, supplying the market with issues volumes suitable to its absorption capacity and thus avoiding undesirable increases in financing costs. In Italy this approach to debt management, already in line with international practice, historically has had (and still nowadays has) to take into account the huge size of debt, both in absolute figures and in relation to GDP. This necessarily led to an even more prudent attitude towards risk, for two kinds of reasons. The first of these - as already set out in the previous editions of this Report - is the fact that, as to Italy, a main component of the level of interest rate at issuance of government securities is the credit risk premium required by investors to fund a highly indebted entity17. This component is largely unrelated to economic cycles, as opposed to countries with a lower debt and higher credit rating, where interest rate movements on debt are far more consistent with the economic cycle, making the management of interest rate risk less pivotal in relation to debt-to-GDP ratio’s dynamics. In Italy, instead, the risk premium in the medium-term tends to be negatively correlated with economic growth, precisely because of the perception of debt sustainability. This is why it is necessary to strive for a debt composition that is the least vulnerable, whenever possible, to market interest rate fluctuations.
16 For details on cost and risk measures, see next paragraphs in this chapter. 17 Following the introduction of the single currency, perception and quantification of credit risk for high debt countries in the Euro area declined greatly; however, they reappeared after the 2007-2008 global financial crisis and moreover with the following sovereign debt crisis, after which credit spreads between high debt countries and others have not returned to the same degree of convergence than before the crisis.
8 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
Secondly, given the high level of debt, it is more important for Italy than for other countries to stabilize interest expenditure and make it more predictable, in order to avoid a resort to the fiscal lever following any interest rate shock, as well as to better manage public finance in accordance with EU requirements, largely based upon deficit and debt dynamics control. Then, due to both the above issues, since many years it is paramount to Italy to place market risks control (mainly interest rate and refinancing) at the very heart of its debt management strategy.
Refinancing risk metrics and managing tools The benchmark metric to measure this risk is average life of government bonds stock, which is calculated on all outstanding securities, where each of them is weighted to its face value18. After a decline that started in 2011, by the end of 2014 the average time to maturity of Italian government bonds had almost stabilized at 6.38 years, then started to rise again to 6.52 in 2015 and 6.76 years in 2016. In line with the above mentioned Policy Statement and the Ministerial Directive, the objective of curbing debt cost while also paying particular attention to cost/risk profile has therefore been operationally defined, even in 2017 Guidelines, as the implementation of debt issuance and debt management policies aiming to increase the average time to maturity, if allowed by market conditions. At the same time, management of refinancing risk needed to be pursued through a gradual reduction in volume of securities maturing in years of highest concentration of redemptions, aiming to smooth redemptions profile. In particular, given the annual maturity profile at the end of 2016 (see Chart I.1) and the monthly maturity profile until 2019 (see Chart I.2), a need was found to mainly reduce not only volumes maturing in the 2018-2019 period, but also in the heaviest months of 201719 by preferably focusing buybacks and debt exchanges transactions on securities maturing in that year and, where possible, carefully adjusting the issuance of BOTs.
18 Definition of “nominal value” used in this report is that adopted by EC Council Regulation No 479/2009 of 25 May 2009: “The nominal value of a liability outstanding at the end of the year is the face value. The nominal value of an index-linked liability corresponds to its face value adjusted by the index-related change in the value of the principal accrued to the end of the year. Liabilities denominated in the national currency and exchanged through contractual agreements to a foreign currency shall be converted into the foreign currency at the rate agreed on in those contracts and shall be converted into the national currency on the basis of the representative market exchange rate prevailing on the last working day of each year… Liabilities denominated in a foreign currency and exchanged through contractual agreements to the national currency shall be converted into the national currency at the rate agreed on in those contracts”. 19 February, May, June, August and November.
MINISTRY OF ECONOMY AND FINANCE 9 2017 PUBLIC DEBT REPORT
CHART I.1 ANNUAL PROFILE OF MATURITIES - MEDIUM-LONG TERM SECURITIES OUTSTANDING AS AT 31- 12-2016 (€ million) 220,000 200,000 180,000 BTP BTP€i BTP Italia CCT CTZ Foreign 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000
0
2022 2035 2067 2017 2018 2019 2020 2021 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2036 2037 2039 2040 2041 2042 2043 2044 2045 2046 2047
2053-2063
CHART I.2: MONTHLY PROFILE OF MATURITIES – MEDIUM-LONG TERM SECURITIES OUTSTANDING AS AT 31-12-2016 (€ million) 50,000 45,000 BTP BTP€i BTP Italia CCT CTZ Estero 40,000 Foreign 35,000 30,000 25,000 20,000 15,000 10,000 5,000
0
Jul-17 Jul-18 Jul-19
Apr-17 Apr-18 Apr-19
Jan-17 Jan-18 Jan-19
Oct-17 Oct-18 Oct-19
Jun-17 Jun-18 Jun-19
Sep-17 Sep-18 Sep-19
Mar-19 Mar-17 Mar-18
Feb-17 Feb-18 Feb-19
Aug-17 Aug-18 Aug-19
Dec-17 Dec-18 Dec-19
Nov-17 Nov-18 Nov-19
May-17 May-18 May-19
In addition, the such policies were also aimed at stabilizing the balance of the Cash Account, smoothing out as much as possible the short and very short-term fluctuations in Treasury cash availability.
Interest rate risk metrics and managing tools Interest rate risk is mainly measured by three metrics, namely duration (or financial duration), average refixing period (average time for the debt to incorporate market interest rate changes), and Cost-at-Risk, which quantifies maximum additional cost for interest expenditure in case of adverse rates
10 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
scenarios, together with the probability of actually having to bear this additional cost as a result of the likelihood of such adverse scenarios20. The Framework Decree for 2017 in art. 2, paragraph 2, stipulates to curb total debt cost not only consistent with the protection from refinancing risk but also in relation to the exposure to changes in interest rates. Market situation at the end of 2016 showed, on the other hand, more uncertain prospects, especially in terms of interest rate trends, making the achievement of a further increase in financial duration and average refixing period more challenging than the result achieved in 2016. In order to be able to maintain, if not improve, the level of these risk indicators, issuance had to be coupled with interventions on the outstanding debt: buybacks, bond exchanges and derivative instruments. Cost-at-Risk (CaR) analysis was used, by way of an internally-developed model in use for some years now by the Public Debt Directorate, called SAPE21 (Software di Analisi dei Portafogli di Emissione - Issuance Portfolios Analysis Software), to determine - with a predetermined degree of probability - an expected cost level not to be exceeded, as well as all those mix of securities issuance whose cost-risk combinations were located at an efficient frontier, that is to say they were dominant - for a given level of cost or risk - compared to any other hypothetical composition of the issuance portfolio. In order to test features of the hypothetical issuance portfolios, for each of them an estimate was made, for a given future time period, of both its cost (in terms of interest expenses) and Cost-at-Risk (calculated for different possible scenarios in interest rates and inflation trends). The outstanding debt database used by SAPE at the end of 2016 included domestic securities, USD denominated securities and derivatives. Given the constraints on both USD issuance and derivatives over the coming years, it was assumed that refinancing of redemptions in future years would only take place via domestic securities and that no any new derivative transaction would be entered into for interest rate risk management purposes. This hypothesis should not be viewed as opposed to the option of also considering possible issues under foreign currency programs, since these can be placed subject to financial conditions that are generally better than, or at least the equal of, those obtainable with equivalent domestic instruments; so they make no substantial difference in simulating future issues.
The role of issuance strategy in managing rate/cost risk trade-off in 2017 An issuance policy aiming at lengthening average life and refixing period or financial duration, i.e. at improving refinancing risk and interest rate indicators, should always be assessed in combination with the higher cost entailed by this
20 See the Focus "The main quantitative indicators of interest rate risk" on p. 22 of the Annual Report on Public Debt 2014, available at the address already cited in note 9 of this Chapter. 21 The model used by the Treasury and the development of the relevant SAPE software were established thanks to a financing of the Ministry of Education’s 2003 Fund for Investment in Basic Research, disbursed to the Calculation Applications Institute (CAI) of the National Research Council (as leader of a Group that included other academic institutions, such as Bocconi University, University of Milan, and Tor Vergata University of Rome). Over the years, the model has gone through various stages of further development, which have been coordinated by the CAI itself and the Ministry of Economy and Finance, which, in recent years, also made use of the analytical and IT support of SOGEI. For further information about SAPE, see the relevant in-depth Focus in Public Debt Report 2014, p. 27, see above.
MINISTRY OF ECONOMY AND FINANCE 11 2017 PUBLIC DEBT REPORT
strategy, due to the higher yield required by the market for securities with a longer maturity. Therefore, planning of the year issuance portfolio had to take into account this trade-off, by assessing the marginal cost required by the market to improve the above-mentioned risk indicators. To address this point, while setting the "Guidelines for the year 2017" at the end of 2016, the Public Debt Directorate preliminarily identified a set of possible issuance portfolios of domestic securities, deemed compatible with market conditions and the main features of Italian public debt management. These portfolios were selected for their feasibility, also taking into account market analyses produced by financial research centers, banks, central banks and other financial institutions. As a prerequisite, further than securing an adequate Treasury liquidity to meet all cash management needs, all the portfolios were required to allow to fund: a) the medium/long-term securities maturing in 2017 (equivalent to more than € 217 billion), b) the redemption of the outstanding BOTs (equal to slightly more than € 107 billion), together with those relating to the - BOTs to be issued and maturing by the year, c) Central Government net borrowing (expected at that time to be just under € 50 billion, as estimated in the EDF Update of September 2016, or slightly more than € 55 billion, as planned in the Draft Budgetary Plan of October 2016).
The features of the eight portfolios that have been analyzed are summarized below:
CHART I.3: ISSUANCE PORTFOLIOS ANALYSED FOR 2017 CCTeu Linker BTP 15-50Y BTP 3-10y CTZ BOT 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% A B C D E F G H I
Portfolio A (or Portfolio 2016): it coincided to the composition of domestic issues adopted in 2016, featuring, in gross terms, about 38% of BOT issues, almost equally divided between the 12m and 6m maturities, less than 5% of CTZ, just over 7% of CCTeus, almost 6.5% of linkers (including BTP€i and BTP Italia), and all the rest in nominal BTPs. Of these, almost 15% were represented by the shorter
12 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
securities of the sector (3 and 5 years), 17.6% by the maturities of 7- and 10-year and, finally, a share of the longer-term segment of 10.25%22;
Portfolio B: compared to the 2016 Portfolio, it included a considerable increase in the share of Italian and European inflation-linked securities, in particular on 5 and 10-year maturities. The tested portfolio included a slight increase of BOTs and 3-year BTPs. With the exception of the 7-year BTP and the CTZ, which remained almost unchanged, all the other segments were reduced, mainly in the 10-y BTP segment, but also in the longer ones; this portfolio, far from being actually viable given the high share of linkers, was designed in order to test and highlight the impact on both cost and risk of an increase in the debt exposure to inflation (both domestic and European), coupled with a similar reduction in long-term nominal security issues, including the 10-year maturity;
Portfolio C: compared to the A Portfolio, the share of BOTs remained essentially unchanged, while the share of issuance of European inflation link bonds was removed. On the other hand, the amount that in the A Portfolio had been allocated to BTP€i was placed on BTP Italia securities. Furthermore, the share of securities with short maturities was reduced (just slightly for the CTZs and the 3- year BTPs, more substantially for the 5-year BTPs) while the shares of securities with longer maturity were increased, in particular the 10 and 15-year BTPs. With this portfolio, the Treasury tried to capture the effects stemming from possible divergent trends between European and Italian inflation, by increasing the exposure to the latter against the former, while also keeping the focus on medium-long term, fixed-rate lines;
Portfolio D: compared to the A Portfolio, there are no issues of BTP Italia in favour of BTP€i as well as CCTeu and the 10 and 15-year BTP segments; in this sense, the motivations are specular to those of the portfolio C;
Portfolio E: this portfolio was not dissimilar from the A Portfolio; however, it included a slight increase in the BOT share (mainly the 12m component), in the CTZ and the 3-year BTP segment, offset by a slight reduction in long and extra- long BTP segments. With this portfolio, the Treasury tried to test the cost-risk effects stemming by a slight shift of the weight of BTP issues from the long end of the curve to short-term securities up to the 3-year point;
Portfolio F: compared to the A and E Portfolios, it included a substantial increase in BOTs and CTZs, a large reduction in the whole BTPs line, mainly on the long end, and a small shift of the linkers lines in favour of BTP Italia; in this case, it was selected a highly short-term focused portfolio, to assess its properties in terms of potential increase in interest rate risk, against an almost certain reduction in average cost at issuance;
22 2016 issues details are reported in Tables III.6.a and III.6.b in the subsequent Chapter III.
MINISTRY OF ECONOMY AND FINANCE 13 2017 PUBLIC DEBT REPORT
Portfolio G: compared to the A Portfolio, it features a re-composition of the BTP line, with a slight reduction of the 3 and 5-year segments in the short end and of the 30 and 50-year points in the long end of the curve, to the benefit of the 10 and 15-year segments, while also leaving BOTs unchanged and slightly reducing CTZs. Linkers were expected to slightly increase, partly on BTP Italia and partly on the longer tenors of the European-inflation indexed securities. This portfolio was conceived to favour the central points of the curve by marginally underweighting the nominal 5-year area and the extreme points of the curve (30 and 50 years), with the aim to test its properties in terms of changes in interest rate risk with respect to the expected change of average costs at issuance;
Portfolio H: compared to the A Portfolio, it included a marked reduction in issues of the BOTs and a strong rebalancing of issues from nominal BTPs with a maturity of up to 7-y in favor of long BTPs and BTP€is, with maturities of more than 10-y; the analysis of this portfolio aims to highlight the effects stemming from a issuance strategy highly unbalanced on long maturities. It mainly aimed to assess what would be the cost increase to be incurred to obtain an extension of duration and average life of the debt, entailing clear benefits in terms of reducing interest rate and refinancing risks.
The analysis was carried out, for each issuance Portfolio, over a 30 year period and the effects in the first 4-year period (2017-2020) were examined. All the Portfolios were tested under 200 scenarios - generated by the SAPE model - for the Italian government yield curve, the zero coupon inflation swap curves23 for linkers and the 6-month Euribor. The generation of interest rate scenarios took into account available information about the duration of the PSPP program, which would have had certainly to continue at least until the end of 2017. The selected cost metric was the expected change in average monthly interest expenditure in the 4-year considered period. Risk metric was given by the difference between (i) the trend in average monthly interest expenditure in the 4- year period which allowed only a 5% probability that this might increase and (ii) the one expected above (Relative Cost-at-Risk). Most of the tested portfolios (7 out of 8) provided results very similar to each other in terms of cost-risk with the exception of the most extreme ones (F and H), that have obviously been discarded as too risky or expensive compared to alternative portfolios. The E Portfolio proved to be among the most efficient, in the sense that - with the sole exception of the B portfolio, largely overweighting the inflation sector - it was found that all the others allowed to achieve a lower risk, but only at a significantly higher expected cost. This is the case for the A, C, D, G and I portfolios. Therefore, the model allowed to assess that in 2017, excluding the B portfolio (entailing a so high increase in the inflation linkers to be hardly absorbed by the
23 Zero coupon inflation swap curves are commonly used to price swap contracts in which two counterparties exchange a nominal fixed flow for an inflation-indexed variable one, so as to equal the present values of the two flows. These curves are crucial to the SAPE model because they allow to model future indexed securities issues starting from nominal yield curves.
14 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
market without altering the supply-demand balance), the best option would have been to slightly increase the share of BOT, CTZ and the 3-year BTP, offset by a slight reduction in long and extra-long tenors of the BTP sector.
The role of derivatives in managing the trade-off between rate risk and cost for 2017 As already pointed out24, the objective of curbing the cost of debt subject to an acceptable risk level of outstanding debt structure, that international best practices assign to DMOs, cannot be accomplished once and for all at the time of issuance and with reference to market conditions existing at that time. It is rather a practical, dynamic activity, still ongoing even after issuance. Among the tools held by DMOs to manage those risks after issuance, there are - in addition to bond exchanges and buybacks - interest rate derivatives. Indeed, these allow to curb interest rate risk by modifying the composition of portfolio’s rates without need for changing features of the debt already placed among investors25. Possible gaps between the portfolio structure stemming from the outcome of capital market placements and the management objectives considered as suitable can be covered by derivatives26, thus increasing DMOs’ ability to meet their targets and partly disengaging the achievement of those goals from the trends prevailing at the time of placements. Issuance activity can only be managed - especially in the Italian case, considering the size of the debt - with continuity and predictability, in order to ensure that potential buyers of securities are provided with the technical prerequisites of the indispensable liquidity of their investment. Derivative transactions, on the contrary, are detached to a pre-established timetable, and can be performed at any time market conditions allow to meet the specific needs of the debt manager. By this way, they help to remove a factor of rigidity in the DMO’s management action. The Framework Decree, in authorizing the use of derivative instruments, stipulated that they contribute to achieve the general management goals of curbing total debt cost and protect from market and refinancing risks, on the basis of available information and market conditions. Further management constraints about the use derivatives in debt management arose since 2015, following the publication in September 2014 of the new rules set by Eurostat for accounting the market value of swaps stemming from the restructuring of pre-existing swaps or swaptions. In fact, according to these rules and limited to the cases mentioned above, these transactions have an impact on the debt level, although on a mere accounting basis, since they do not
24 For an essential and wider analysis of the objectives aimed for with derivatives in such a debt management perspective see above, I.1, as well as the documents mentioned there. 25 For a synthesis on the types of derivatives carried out by Public Debt Directorate inside the Treasury Department, see section III.3 of the Public Debt Report for 2014, available at the address reported on Note 9 of this Chapter. 26 A 2008 document jointly drafted by experts at the OECD, the IMF and the World Bank outlines this practice adopted by many sovereign DMOs, emphasizing that “The implementation of the debt strategy may include the use of derivatives to separate funding decision from the optimal portfolio composition decision, reduce the cost of borrowing, and manage risks in the portfolio (in particular interest rate refixing risk and refinancing risk).” OECD (2008) “Use of Derivatives for Debt Management and Domestic Debt Market Development: Key Conclusions” available on http://www.oecd.org/fr/finances/dette-publique/39354012.pdf.
MINISTRY OF ECONOMY AND FINANCE 15 2017 PUBLIC DEBT REPORT
entail any actual funding. The Framework Decree thus stipulated that derivative transactions were expected to be complementary to issuance activity, also taking into account general public finance targets, in the light of the accounting effects stemming by the above EU rules, while continuing to contribute to an increase in debt average refixing period and financial duration27. In 2017, accordingly, liability management and interest / exchange rate risks management focused on restructuring some derivative transactions, in cases where some critical issues had stemmed from the abovementioned statistical- accounting changes. The pursued goal was mainly to work on swaptions expected to be exercised in the year, in order to reduce the increase in debt that - as stipulated by the new harmonized EU accounting scheme ESA 2010 - would have risen from the generation of underlying off-market swaps.
To achieve the goal of curbing debt cost while paying attention to the cost/risk profile To pursue the set goals, Treasury’s 2017 strategy in the two main phases of debt management was set as follows:
Policies at issuance of domestic and foreign securities In line with 2017 Guidelines’ statements and in view of the above-mentioned targets as for average life, duration and average refixing periods, and following the cost/risk trade-off analysis, the issuance policy for 2017, considering the higher amount to be offered in the market compared with 2016, needed to aim to as follows: a. adjust BOTs issuance so as to obtain at the end of 2017 an only marginally higher stock than the previous year, while maintaining unchanged the weight of the sector on total government securities, as well as ensuring the regularity of 6 and 12-month BOT placements; exploit instead the flexibility offered by the use of quarterly or flexible BOTs in the event of specific cash needs; b. return to offer CTZs on a monthly basis, with the aim of total new issues being not too much far from amounts to be redeemed; c. moderately increase the 3 and 5-year BTP issues to take into account the greater funding needs of 2017, mainly by a slight increase of the relative weight of the 3-year BTPs; d. keep unchanged the overall volumes issued on the 7 and 10-year BTPs, in a context of regularity of placements and if allowed by demand conditions; e. on the longer nominal maturities, diversify the supply according to demand trends, taking advantage of the availability of four tenors (15, 20, 30 and
27 Pursuant to 2005 Budget Law (Law No. 311 of 30 December 2004), certain derivatives contracts were put in place with reference to public entities loan receivables transferred to the Treasury from the budget of the Cassa Depositi e Prestiti, following the transformation of the latter into a stock company (Article 5 of Decree- Law No. 269 of 2003 – a decree attached to the 2004 Budget law - converted, with amendments, by Law No. 326 of 2003). The notional amount of these contracts is just over 2 percent of the Treasury’s whole derivatives portfolio, as shown in detail in Table III.11 (Chapter III). These transactions are not a part of the management of the Central Government debt and, accordingly, are not addressed in this Report.
16 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
50years) and by flexibly reacting to any raise of qualified demand of off-the- run securities in this segment, with the aim of maintaining a significant presence in this market; f. ensure continuity of the CCTeu issues on the 7-year maturity, increasing the volumes at issuance to take into account the redemptions of the year, while however keeping basically unchanged the weight of this line on the year-end total stock; g. increase the BTP€i issues compared to the previous year, always taking into account the conditions of demand and allocating the supply between the various tenors, with a view to launching a new 10-year BTP€i; h. offer BTP Italia in two placements, returning to the 6-year maturity, in order to foster the reinvestment - mainly by retail - of substantial amounts maturing, with the prospect, in any case, of a strong downsizing of the sector, given that the new two-phase issuance mechanism allows for an adequate control of the final amounts placed; i. assess, in relation to market conditions and subject to the availability of a collateralization system for swaps hedging the exchange rate risk, a possible return to issue under the Global Program, in particular on the USD market. Assess the opportunity to continue issuing under the MTN program to meet the demand of primary institutional investors, to meet specific requests and subject to a lower funding cost compared to similar domestic instruments, while also avoiding negative effects on normal issues in public format.
Post-issuance debt management operations As already mentioned, in order to achieve the objectives set out above with the outstanding debt portfolio, the Treasury may also make use of bond exchange transactions and buybacks of government bonds as well as of derivatives. Bond exchanges and buybacks are debt management tools designed to curb refinancing risk, by reshaping redemptions profile while, at the same time, fostering liquidity and efficiency of government bonds secondary market. Unlike ordinary issuance activities, these transactions does not follow a scheduled timetable, but depend on Treasury's specific needs and on market conditions. Participating in bond exchanges and buybacks is reserved to Specialists28 in government securities. More in detail, bond exchanges consist of the issuance of a bond in return for one or more outstanding securities. It is therefore an exchange of government bonds having different maturities, which may help to limit the refinancing risk. For such operations, the Treasury may use the Bank of Italy's auction system or the electronic trading system. Buyback transactions, instead, allow the Treasury to early redeem outstanding government securities. To this purpose, financial resources can be
28 For a general illustration of the role of Specialists in government securities, see Chapter II.3 of the 2014 Public Debt Report, available at the address referred to in the previous section (footnote 9), as well as the updated information on the relevant page public debt website http://www.dt.tesoro.it/en/debito_pubblico/specialisti_titoli_stato/index.html
MINISTRY OF ECONOMY AND FINANCE 17 2017 PUBLIC DEBT REPORT
taken from the Cash Account or from the Government bonds Sinking Fund. Buyback execution may take place via an auction at the Bank of Italy or through bilateral transactions.
The 2017 Guidelines notably mentioned bond exchanges and buybacks among the main Treasury's tools to be used in view of the high concentration of redemptions scheduled in 2018-2019 and, where possible, also in 2017. The Guidelines further specified that buybacks could also be carried out directly on regulated market (as in the case of bond exchange transactions) and would also be aimed at facilitating the process of reducing outstanding debt stock. Finally, the derivatives activity would consist of active management of the existing portfolio, aimed at improving its performance in the current market context. It would also have been possible to hedge any new issues in foreign currency through cross currency swaps, once a bilateral guarantee system would be fully implemented.
I.4 MONITORING AND MANAGING THE CASH ACCOUNT TO STABILISE THE BALANCE
Cash Account for the Treasury Service The Treasury, in collaboration with the Bank of Italy, manages its liquidity on the basis of the cash flow and relevant balances forecasts. This kind of management - called OPTES activity - also meets the needs of the ECB, which calls for efficient forecasts of the deposits held at their national central banks by Eurozone public institutions in order to facilitate monetary policy. In Italy, such liquidity is mainly held at the Cash Account, the Treasury's account at the Bank of Italy where receipts and payments made under the State Treasury29 service are recorded. In summary, the balance of this account is the sum of all Treasury accounts. In line with EU legislation, which prohibits Central Banks of Member States from funding Governments under any form, the Account may not be overdrawn. Cash Account’s balance records strong volatility, due to both the wide number of entities enabled to move funds at the State Treasury and the huge size of some cyclically repeating monthly flows. In particular, on the revenue side, tax revenues have a strong impact, concentrating in a few days in the second half of the month, while large outflows are linked to pensions disbursement, mainly concentrated in the month’s first working day. Large fluctuations in the Account may also be caused by government bond issuances and, even more, redemptions. Such critical issues led the Treasury, in 2017 as in previous years, to pursue the objective of achieving with this Account an "efficient management of liquidity, considering the issuance strategy for government securities, prevailing market conditions and constraints imposed by monetary policy provisions".
29 For more details, see Ministerial Decree no. 51961 of 26 June 2015 concerning the identification of government deposits established with the Bank of Italy, pursuant to article 5, paragraph 5, of the D.P.R. n. 398/2003.
18 MINISTRY OF ECONOMY AND FINANCE I. DEBT MANAGEMENT OBJECTIVES FOR 2017
How OPTES works Cash management consists of daily operations to ensure that multiple cash flows at the State Treasury enjoy adequate liquidity. This activity is closely linked to public debt management, being the tool for linking securities issuance and the daily fluctuations in the Cash Account. As mentioned, cash management takes place within the so-called OPTES operational framework, which consists of monitoring balances and cash flows and carrying out money market operations. Monitoring relies on a continuous information exchange between Bank of Italy and MEF (General Accounting Office and Treasury Department - Public Debt Directorate), featuring estimated and actual data on all receipts and payments affecting the accounts held at the State Treasury and, consequently, an estimation of the Cash Account balance. Information exchanges include several updates during each business day, with the purpose of estimating end-of-day account balance; MEF’s and Bank of Italy’s liquidity forecasts also include longer- term scenarios, weekly shared, whose time horizon is consistent with monetary policy requirements. Cash management tools, on the other hand, consist of money market operations through daily auctions and bilateral transaction. In this activity, the Treasury is usually a lender of its own liquidity. Treasury's available assets are therefore composed both of liquidity in the Cash Account and of loans granted to financial intermediaries within the daily Treasury OPTES framework.
The regulatory framework for cash management in 2017 In 2017, cash management was carried out in compliance with the principles set out in the General Directive for administrative action and management of the MEF, and according to the Guidelines for the management of Public Debt for 2017. In particular, the Directive provided that the monitoring and management of the Cash account, aimed at stabilizing the balance, should be based on a careful assessment of the account performance, the use of cash management tools and the monitoring of credit risk associated with these transactions, taking into account the strategies of government securities issuance. The Guidelines also set the goal of ensuring a steady presence on the money market on both short-term and very short-term maturities, through daily OPTES lending operations mainly performed via auctions or bilateral negotiations, at overnight or longer duration, in relation to cash needs and market conditions. Since no changes were made to the cash management regulatory framework30, reference was made to the Framework Decree which essentially refers to the ministerial decree of 25 October 2011. Cash management activity in 2017 therefore remained largely unmodified, failing any change in the regulatory framework and being still ongoing the ECB quantitative easing measures put in place in the last few years. Operations were
30 For details on the provisions on liquidity management, refer to sections I.4 and IV.4 of the 2014 Report on the Public Debt and to the same sections of the 2015 Report on the Public Debt. See also Decision ECB/2014/23 (https://www.ecb.europa.eu/ecb/legal/pdf/oj_jol_2014_168_r_0015_en_txt.pdf) and ECB/2014/22 (https://www.ecb.europa.eu/ecb/legal/pdf/oj_jol_2014_168_r_0017_en_txt.pdf)
MINISTRY OF ECONOMY AND FINANCE 19 2017 PUBLIC DEBT REPORT
mainly aimed at curbing the effects of monetary policy decisions which, among other things, penalize government deposits held at national central banks. These deposits are subject to the deposit facility rate, if negative, and to the EONIA rate for the portion not exceeding 0.04% of GDP (in 2017 equal to € 668 million for Italy). In 2017 also, complex issues for cash management were therefore expected, having to implement the regulatory framework outlined in previous years while, at the same time, facing a money market that was uneasy to deal with, as interest rates used to steadily be in negative territory for several years.
20 MINISTRY OF ECONOMY AND FINANCE II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
II.1 MONETARY POLICY AND THE EURO AREA MONEY MARKET
Monetary policy in the Euro area 2017 was characterized by a return to solid economic growth in all Euro area countries, despite the inflation rate remained still below the target set by ECB (below, but close to, 2%), although accelerating compared to the previous year. The effects of economic expansion and rising employment were thus unable to underpin a monetary policy change. In fact, at its last 2016 meeting, the ECB Governing Council decided to continue the purchases scheduled under the APP program (Expanded Asset Purchase Programme) at a monthly pace of € 80 billion until March 2017, while continuing, at least until the end of the year, at a € 60 billion pace. On the same occasion, the Council confirmed its intention to leave unchanged, at their historic low, the monetary policy reference rates. These decisions were repeatedly confirmed at following 2017 Governing Council meetings, as it was considered that "a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term". In fact, economic growth strengthening during the year and increasing employment were not coupled with a similar rise in prices to justify changes in monetary policies. In October 2017, the ECB Governing Council decided to reduce the purchase program by stating that, starting from January 2018, net purchases would continue at a pace of € 30 billion per month, from the previous 60. However, the Governing Council also reaffirmed that, if necessary, it would have been ready to increase again the amount of monthly purchases, while also confirming, moreover, that the proceeds from the redemption of the bonds already held in the portfolio would have been reinvested in debt securities of the same country over a long period. During the same meeting, the ECB confirmed that the main refinancing operations would continue to be carried out by fixed rate tenders entailing a full allotment of the requested amounts at least until 2019. This decision, widely anticipated by financial operators, did not produce substantial changes on the money market, both in terms of changes in short-term rates and in terms of changes in demand and liquidity supply. Lastly, at the last meeting of the year, the ECB confirmed that the APP program would continue at the pace of € 30 billion a month until the end of September 2018 or even further if necessary. The overall effect of all monetary expansion interventions, still ongoing, has been to further increase the excess liquidity compared to the reserve requirement in the Eurosystem - which at the end of the year exceeded € 1,800 billion, compared to
MINISTRY OF ECONOMY AND FINANCE 21 2017 PUBLIC DEBT REPORT
about € 1,200 billion at the end of 2016 - mainly due to purchases of government securities and liquidity introduced into the system with T-LTRO II1 transactions yet to be redeemed at 2017 year-end2. As a whole, the different measures of monetary expansion have directly affected financial markets, contributing to lower main money market rates and government bonds yields and, as already mentioned, increasing the excess of liquidity in the Eurosystem. In addition, positive effects also stemmed on the credit market which, as financing conditions improved for businesses and households, underpinned economic growth and prices level.
Euro area money market As mentioned, in 2017 monetary policy reference rates did not change, remaining unmodified at the levels decided at the March 2016 meeting. In particular, the interest rates applied on main refinancing operations (MRO) remained at 0%, the rates for marginal refinancing operations (marginal lending facility, MLF) were set at 0.25% and the marginal deposit rate (deposit facility, DF) remained at -0.40%.
CHART II.1: INTEREST RATE CORRIDOR OF THE ECB MONETARY POLICY 2015-17 (percentage values) 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4
-0.5
Jul-15 Jul-16 Jul-17
Apr-15 Apr-16 Apr-17
Jan-16 Jan-15 Jan-17
Oct-17 Oct-15 Oct-16
Jun-15 Jun-16 Jun-17
Sep-15 Sep-16 Sep-17
Mar-15 Mar-16 Mar-17
Feb-15 Feb-16 Feb-17
Aug-16 Aug-15 Aug-17
Dec-15 Dec-16 Dec-17
Nov-15 Nov-16 Nov-17
May-15 May-16 May-17 DF MRO MLF
1Through targeted longer-term refinancing operations (TLTRO), the Eurosystem offers to banks loans with maturities up to four years. These operations are aimed at improving the functioning of monetary policy transmission mechanism, supporting the provision of bank credit to the real economy. Two series of transactions have been carried out: the first, consisting of eight auctions (TLTRO-I), was announced in June 2014; the second, composed of four operations (TLTRO-II), in March 2016. 2 The ECB announced on June 22, 2018 that in line with Decision ECB/2016/10 of 28 April 2016 on measures related to targeted longer-term refinancing operations, participants in the second series of TLTROs (TLTRO-II) shall have, on a quarterly basis, the option of terminating or reducing their outstanding amount of TLTROs before scheduled maturities, ranging from 2020 to 2021.
MINISTRY OF ECONOMY AND FINANCE 22 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
Main interbank market rates also remained virtually unchanged throughout the year. The EONIA rate (Euro Over Night Index Average), approaching the deposit facility rate and moving alongside it in excess of liquidity circumstances, fluctuat- ed around -0.35% for almost the entire year, with the exception of an anomalous increase of about 10 bps at the end of November, which returned within a few days. The ECB confirming that rates would remain at historically low levels for a long period, coupled with abundant liquidity, affected EURIBOR rates (Euro Inter Bank Offered Rate), which stably stood on negative values for the whole period taken into account. For example, as can be seen in Chart II.2, the 3-months Euribor constantly remained around -0.33% for the full year.
CHART II.2: PERFORMANCE OF THE MAIN MONEY MARKET RATES IN 2017 (percentage values)
0.100
0.050
0.000
-0.050
-0.100
-0.150
-0.200
-0.250
-0.300
-0.350
-0.400
-0.450
Jul-16 Jul-17
Apr-16 Apr-17
Jan-16 Jan-17
Oct-16 Oct-17
Jun-17 Jun-16
Sep-16 Sep-17
Mar-16 Mar-17
Feb-16 Feb-17
Aug-17 Aug-16
Dec-16 Dec-17
Nov-16 Nov-17
May-16 May-17
DF rate MRO EONIA EURIBOR 3M
In the money market, repurchase agreements are getting more and more important. In this segment too, reference rates remained mainly negative, market dynamics being driven by abundant liquidity and official rates, as well as by the search for high quality collaterals. As already highlighted last year, Repo General Collateral rates for the euro area main sovereign securities were negative throughout the whole 2016 and - in the case of France and Germany - even at levels well below the marginal deposit rate. In 2017, the same also happened for the corresponding Italian rate, which reached equal or slightly lower values than the marginal deposit rate, showing Italian securities also being perceived as good-quality and high-liquidity collaterals on the money market.
MINISTRY OF ECONOMY AND FINANCE 23 2017 PUBLIC DEBT REPORT
II.2 EURO AREA BOND MARKETS
In 2017 the euro area bond markets showed a trend largely influenced not only by European macroeconomic situation, recording first signs of a recovery consolidation, but also by geopolitical events and by diverging evolution of main developed countries monetary policies. 2017 opened in continuity with a trend lasting from the final months of 2016, when a first reversal of the declining path in the Eurozone sovereign bonds yields occurred. This increase was, on one hand, attributable to investors’ expectation, actually materialized later, about the decision of the ECB Governing Council in December 2016 to a de facto slackening of the unconventional monetary policies. This happened through a prolonged extension of the "APP" purchase program, initially scheduled to end in March 2017, until December 2017, but at a reduced pace from € 80 to € 60 billion a month. On the other hand, two factors from the United States had a strong influence: the Fed December 2016 decisions not only included a 0.25 bp increase of rates, but also provided an indication about three possible further increases in 2017, against a general market expectation of only two increases. The market reacted to such news with an increase occurring not only for US Treasuries but also for European interest rates, starting with those on intermediate maturities (2-5 years). The other US element, of a purely political nature, was the presidential election on November 9, which triggered expectations of greater stimulus in US fiscal policy, leading to upward revisions on growth and inflation expectations. In the first half of 2017, in continuity with what was already happening in the final weeks of 2016, the trend in euro area government bonds rates saw a marked increase in performance (see Chart II.3), coupled by prolonged episodes of high daily (and infra-daily) volatility. As mentioned, the rising trend in government bond rates was grounded in expectations of an accelerating withdrawal of monetary stimulus in the US, together with an economy growth rate strong enough to trigger – after many years - inflationary expectations. This effect, coupled with a marked improvement in economic conditions, both in US and EU, has therefore supported an increase in government bond yields starting from the tenors of 3/5 years onwards. On the other hand, increases in instability and in risk premium that were observed in the first few months of 2017 were mainly due to the EU internal geopolitical context: in Italy, the outcome of the constitutional referendum taken at the end of 2016 led to the appointment of a new government with an explicitly shorter-term political horizon; in France, the approaching of the election of a new President of the Republic and then of a new Parliament. The largest increases were observed for the bonds of Belgium, Italy, and Spain. As shown in Chart II.3, from August 2016 to the end of the 1Q2017, the European government bonds yields increased on average by more than 50 bp (even by 100 bp in the case of Italy).
MINISTRY OF ECONOMY AND FINANCE 24 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
CHART II.3: TREND OF EUROPEAN GOVERNMENT BOND YIELDS - 10 YEARS MATURITY (percentage values) 2.50 Spain France 2.00 Germany Italy
1.50
1.00
0.50
0.00
-0.50
As already had happened in the 2015-2016 period, also 2017 was characterized by the ECB Quantitative Easing operations which, although lowered in March to € 60 billion net monthly purchases, instead of the previous € 80 billion, contributed to curb interest rates on all the main medium-long term maturities. On the very short maturities, widely negative rates were consolidated because of the level of the ECB overnight deposit rate, set at -0.40 percent since March 2016. It should be noted, however, that in 2017 the broader and sustained recovery of the European economy laid the basis for a gradual tightening of the ECB's tone towards a gradual reduction of monetary stimulus, materialized at first in occasion of the March 9 Board meeting (when the President declared that "risks of deflation have largely disappeared” in the Euro area and no longer stated that the ECB, if necessary, will use “all the instruments available within its mandate" to "achieve its objective"). A second occasion was the meeting of June 8 (when the reference to possible rates "lower than the current ones” was removed from the press release). Since 2Q2017, the fundamental issues that had driven investors' behaviour and European government securities yields’ performance dramatically changed. The outcome of French presidential elections led to a very strong re-pricing of the Eurozone sovereign bonds, not just the French ones. Furthermore, in addition to the continuation of ECB purchases under the PSPP program, the last of TLTRO-II transactions was concluded at the end of March. All these policies have further contributed to lower rates, mainly in the short part of the curve. Afterwards, speed and linearity of the yields’ decreasing trend were limited by two facts, especially on the long maturities of the curve: the FED began the
MINISTRY OF ECONOMY AND FINANCE 25 2017 PUBLIC DEBT REPORT
tapering3, leading to a subsequent normalization of the US yields curve, and the ECB used less accommodating tones in October, as (while communicating the reduction in the monthly amount of securities purchases within the PSPP program from € 60 to 30 € billion per month) remained committed to countering an excessive appreciation of the euro against other major currencies, especially USD. Further elements, which drew the attention of investors, emerged in 2H2017. These were the rapid resolution of the Banco Popular Español crisis, leading to an acquisition by Santander, and the continuation of the euro appreciation trend. At the end of 2017, in addition to a political event such as the Spanish separatist crisis and the following referendum, markets (mainly the banking sector) were significantly affected by the ECB newly-published guidelines about non-performing loans (NPL). For new NPLs, the ECB set minimum levels of provisions while also stipulating that in any case, since January 2018, they are to be fully provisioned after a maximum of 2 years for unsecured loans and after a maximum of 7 years for secured loans.
Details on the evolution of the Public Sector Purchase Programme (PSPP) during 2017 The Public Sector Purchase Programme (PSPP) is the program to purchase bonds issued
FOCUS by central governments and public agencies of euro area countries, as well as by supranational institutions, announced on 22 January 2015 by the Board of Directors of the European Central Bank4. In the January 2015 decision, the ECB set a period of intervention until September 2016 at least, a term extended until December 2017 with the decision of December 8, 20164. This section shows the main changes to the program implemented in 2017. a) With monetary policy decisions of January 19 20175: - It has been established that purchases of securities under the APP program with a yield to maturity below the ECB deposit facility (provision contained in the monetary policy decision of December 8, 2016), will not include securities falling within the Third Covered Bond Purchase Programme (CBPP3), the Asset-backed Securities Purchase Programme (ABSPP) and the Corporate Sector Purchase Programme (CSPP). On the contrary, securities purchased under the PSPP will be included, but it has been stressed that priority will be given to securities with a yield higher than the deposit facility rate.
b) With monetary policy decisions of October 26, 20176: - The Governing Council established to extend the purchase plan at least until the end of September 2018. - Concerning the size of the APP purchase program, purchases by ECB are announced to stick at a monthly rate of € 60 billion until the end of December 2017, while a reduction in average monthly purchases from € 60 to € 30 billion was expected from January 1, 2018 until the end of September 2018. The ECB Governing Council announced to be ready to increase the APP
3 In describing the activity of the FED and the ECB, tapering refers to the process of gradual reduction of unconventional monetary policies and in particular of large-scale purchases (Quantitative Easing) of government bonds or other financial assets in order to provide liquidity to the economy and stimulate growth. 4 For further information about introduction of the PSPP, market impact and changes made in 2015 and 2016, see the related focuses in 2015 and 2016 Public Debt Reports. 4 A first extension of the Program deadline was planned with the decision of March 10 2016, which postponed the expiry of the program to March 2017. 5 http://www.ecb.europa.eu/press/pr/date/2017/html/pr170119_1.en.html 6 http://www.ecb.europa.eu/press/pr/date/2017/html/ecb.mp171026.en.html
MINISTRY OF ECONOMY AND FINANCE 26 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
program both in terms of duration and size of average monthly purchases in the event that conditions would have become less favourable, or that financial conditions would have proved inconsistent with a lasting adjustment of the inflation trend, in line with the objective of achieving inflation rates of below, but close to, 2% in the medium term. The following chart shows net monthly purchases trends since the program started in March 2015:
FIGURE 1: NET MONTHLY PURCHASES UNDER THE APP PROGRAMS
€ Bln 90 80 70 60 50 40 30 20 10 0 M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2015 2016 2017
®Source: MEF on ECB data
- By the same decision it was announced that, in order to foster favourable liquidity conditions and to ensure an adequate monetary policy management, the Eurosystem would reinvest the proceeds of redeemed APP program securities for a prolonged period, exceeding the program deadline. As regards the proceeds of redeemed PSPP securities, it is established that the Eurosystem would reinvest these amounts in purchasing government securities issued by the same country of the redeemed bonds7; moreover, reinvestments would have taken place in a flexible and timely way, either directly in the month of redemption or at the latest in the two following months, based on market conditions. Therefore, average monthly purchases could have undergone significant fluctuations depending on the timing chosen for the reinvestments. With regard to the activities carried out by the ECB under the PSPP on the Italian government bond market, in 2017 the purchased Italian government securities totalled € 117.1 billion. Since the program has started until the end of 2017, the overall amount of Italian securities purchased by the ECB was € 326.7 billion8. The stock of Italian securities held by the ECB on 31 December 2017 had an average life of 8.11 years.
7 Regarding the Purchasing Program in force for the Private Sector, the absence of a rigid connection between the country with expiring volumes and the country of destination of reinvestments is underlined, as purchases are widely addressed towards the capitalization of the eligible securities. 8 These amounts are expressed in terms of counter value.
MINISTRY OF ECONOMY AND FINANCE 27 2017 PUBLIC DEBT REPORT
II.3 TRENDS IN THE ITALIAN GOVERNMENT BOND MARKET
Yield curve evolution Italian government bonds 2017 yields’ trend of (Chart II.IV) was affected not only by the previously mentioned international geopolitical events, but also by some idiosyncratic factors which will be briefly illustrated below, namely by the evolution of the political and economic scenarios. The national political scenario had already began to radically change at the end of 2016. Following a rapidly increasing consensus - in opinion polls - about a rejection of the constitutional reform, coupled with the risk of a subsequent deadlock and instability phase, fears about a possible fall of the government then in charge led investors to further limit their exposure to Italy, in some cases by reducing their position in the existing portfolios, in other cases by failing to provide support as securities prices were falling. This scenario was then confirmed in the early months of 2017, with Gentiloni succeeding Renzi as Prime Minister. Among the first challenges the new government had to face, there were the consequences of the decision by the rating agency DBRS, in January, to lower by a single notch9 - from A (low) to BBB (high) - the credit rating of the country. Inter alia, this decision also affected the guarantees that Italian banks are required to provide to the European Central Bank, increasing the haircut that the ECB10 applies on Italian government bonds used as collateral by banks asking for liquidity. Some of the reasons behind the decision of the rating agency, even more deeply perceived among investors, were the risks concerning a possible discontinuation in structural reforms, the high level of NPLs in the banking system, and the risk of a lack of support to economic growth. However, after a period of strong rise in rates begun in the last months of 2016 along with the referendum, the yields trend marked a retracement across the whole curve spectrum, from the shorter to the ultra-long, bringing at end- January the 10-y BTP yield in the 1.7% area, after having exceeded 2% for several previous market sessions. In the following months, the market essentially responded to political pressures coming from the upcoming French presidential election. Indeed, there was a widespread feeling among investors that anti-EU parties could emerge. This caused not only an increase in yields, in Italy as in all other European countries, but also a return of volatility, including the infra-daily one. The yield of the 10- year benchmark bond rapidly reached the rate of about 2.4% and then - albeit fluctuating at any news or survey about the intentions of French voters - remained on these levels for several weeks until the elections, whose result was welcomed
9 Rating agencies assessments are expressed in alphanumeric values describing the position of the issuer along the levels of a credit reliability scale. A notch is equivalent to one level of difference between two assessments. 10 In the context of the ECB's operations with bank counterparties, the haircut is the asset value reduction applied by the ECB to calculate the amount of the liquidity to be granted to banks in exchange for the collateral to be received. As example, a 20% haircut means that in exchange for a security collateral for a value of 100, actual granted liquidity will be 80. The haircuts charged by the ECB are based on predetermined parameters which take into account, with regard to credit risk, the ratings issued by 4 agencies (Moody's, Standard & Poor's, FitchRatings and, precisely, DBRS).
MINISTRY OF ECONOMY AND FINANCE 28 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
by investors. However, while both yields absolute level and spreads decreased for all European countries, this reduction was significantly lower in Italy. Although signs of a more solid than expected economic recovery had begun to emerge (both through economic production indicators, and in forward-looking business and consumers indicators), leading main Italian and international institutions to review their forecasts for the current year, political uncertainty continued to be heavily weighted among investors. And this even though the newly entered–in-charge Government had launched or completed measures deemed as necessary by EU Commission and by major key economic players to remove some critical aspects of the Italian economic system (such as measures aiming at improving bankruptcy procedures and savings protection, and in support of the credit sector). This uncertainty also led the Fitch rating agency to lower its assessment of the Republic from BBB+ to BBB on April 21. After some strong rally market sessions in the early days of June (probably based on traders' expectations about a possible ECB delay in the monetary policy normalization and also thanks to the Santander's rescue of Banco Popular), in which the Italian 10-year bond reached 1.9%, the lowest level in the previous 5 months, Italian yield curve resumed a very sustained upward trend, bringing the 10-year rate up to the highest year level at about 2.3%. In this period investors were worried about the Italian banking situation, and in particular the Veneto banks (for which the Government worked to implement a solution to protect the entire savings system) and the MPS Bank (new business plan). From July onwards, the Italian market resumed a more favourable tone until the end of the year, with a medium-term fall in rates trend, until reaching the minimum in mid-December, with the 10-year bond benchmark settling at 1.65%. Several factors had supported this change: first of all, the dissemination of particularly encouraging, better than expected, industry output data. Secondly, the approval by the EU Commission of the MPS precautionary recapitalization plan, with the subsequent acceptance of the restructuring plan. Thirdly, the approval, by the Parliament, of the law aiming to rescue the two Veneto banks. Finally, a major contribution to the curbing of government bond yields is attributable to a gradual improvement of Italy's credit risk perception due to the positive evolution of macroeconomic and public finance context, with a progressively reducing deficit and an essentially stabilizing debt-to-GDP ratio11. Consistently with the above data, highlighting a clear strengthening of economic fundamentals, in October Standard and Poor's raised by a single notch the Italian rating with a stable outlook. This led to some first positive effects also on the tone of demand stemming from foreign investors, including the Asian ones. As a factor contributing to the positive market trend in the last quarter, it can also be mentioned the circumstance that the Treasury had nearly reached its funding goals for the whole 2017 in October, several months in advance. This allowed to reduce the monthly issuance pace and undertake a steady activity on exchanges and buybacks, aiming at reducing the weight of the redemptions in 2018 and, marginally, in the following years. The last sessions of the year, in a market environment already affected by poor liquidity due to the lower
11 See Chapter III.
MINISTRY OF ECONOMY AND FINANCE 29 2017 PUBLIC DEBT REPORT
participation of traders and the early closure of positions on the bank books, were also influenced by the announcement of the political elections on March 4, 2018, reigniting fears for political instability and therefore penalizing BTP yields.
CHART II.4: MARKET RATES ON GOVERNMENT BONDS - 2-3-5-10-15-30-50 YEARS (percentage values)
3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 -0.25 -0.50
2 year 3 year 5 year 10 year 15 year 30 year 50 year
In 2017, all rates of tenors up to 2 years remained steadily and broadly in negative territory. Thus the range of maturities in the negative area widened from 12 to 24 months compared to 2016, while also showing a decreasing trend and reaching a low in mid-December with a bond yield with a residual life of 2 years of about -0.35%. In this part of the curve, therefore, the trend in rates remained closely linked to that of reference rates set by the ECB. With regard to the 3-year maturity, the spread between the 3-year curve point and the 2-year bond in 2017 gradually widened to reach a level of around 35/40 bp. This figure appears to be quite significant, especially if compared to 2016, in which the spread between the two points was of a few basis points. This spread remained unchanged for the entire year, with the exception of a slight narrowing in December, when also the point of the 3-year curve had negative yields. Similarly, also the 5-year curve point showed signs of weakness, which had already started in the most acute moment of instability at the end of 2016, as the yield had increased from 0.25% to 1.00% in a few market sessions. During the year, it remained close to these levels, then recovered, together with all the other points of the curve, in 2H2017, reaching 0.75% at end-2017. As in the previous year, in 2017 the 10-year point of the curve, the benchmark both for domestic and international investors, basically moved in line with the 5-year point, with an average spread between the two tenors around 130 basis points. The slope of the term structure of the Italian rates for the whole 2-10 year stretch (see Chart II.5) recorded a sudden increase, going from about 145 basis points at end-October 2016 until reaching its high in mid-2017 at around 240 basis points. This trend, begun in the last weeks of 2016, is attributable to the political
MINISTRY OF ECONOMY AND FINANCE 30 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
factors already described in the previous paragraph. Afterwards, as tensions on Italian government bonds eased in the second half of the year, the slope slightly retraced towards 210 basis points, then ending 2017 again close to the highs, i.e. around 235 basis points. Therefore, the slope trend in the 2-10 year segment allows to notice how the ECB's action, in keeping the benchmark interest rates at levels "low for a prolonged period of time and in any case well beyond the end of the purchase program", had a particularly positive impact on the short part of the curve, which steadily remained into negative figures, while the tensions that hit the Italian market mostly spilled over the 10-year point than the 2-year point.
CHART II.5: YIELD SPREAD BETWEEN 10-YEAR AND 2-YEAR BONDS (basis points) 270
240
210
180
150
120
90
In 2017 too, the long-term section of the Italian yield curve continued to move within an essentially positive trend, underway since 2015, also thanks to the inclusion of the securities until the 30-year maturity in the PSPP program. Indeed, for the whole 1H2017, although the yield of the 30-year benchmark shifted from a level close to 3% in early 2017 to levels equal to 3.50%, the spread with the 10- year bond remained almost constant around 110 basis points, if not slightly decreasing.
MINISTRY OF ECONOMY AND FINANCE 31 2017 PUBLIC DEBT REPORT
CHART II.6: YIELD DIFFERENTIAL BETWEEN 30-YEAR AND 10-YEAR MATURITY BONDS (basis points) 150
120
90
60
From June onwards, the 10-year point of the curve recorded a positive trend, as the spread with the Bund plunged from around 200 bp to around 160 bp (with a low of around 130 basis points in mid-December), while the 30-year point of the curve failed to perform in the same way. Indeed, the rate of the 30-year benchmark fell from 3.50% to around 3.30% (following a low of 2.75% in mid- December), while the slope of the 10-30 segment gradually returned from 110 bp to the same 120 bps it had recorded at the beginning of the year. Undoubtedly, the robustness of the long end of the Italian curve allowed the Treasury, also in 2017, to continue to issue substantial amounts without creating distortions or imbalances between supply and demand. In particular, as can be seen in Chart II.7, the slope in the section of the curve between 30 and 50 years has been particularly resilient, recording throughout 2017 even a slight decrease from the already low levels of early 2017 (about 30 bps), eventually closing at year-end at around 20 bps.
CHART II.7: YIELD DIFFERENTIAL BETWEEN 50-YEAR AND 30-YEAR MATURITY BONDS (basis points)
45
30
15
0
The trend of the spread between Italian and German government bonds (Chart II.8), as previously mentioned, recorded a profile that – while partially comparable with that of absolute yields - also showed specific features due to
MINISTRY OF ECONOMY AND FINANCE 32 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
differences in the perception of the two countries’ relative risk. In fact, in 1H2017, the Italian political instability, the problems of the Italian banking system, and the uncertainty about the French elections outcome (entailing unpredictable spillover effects on other non-core countries of the euro area), led the spread to increase in almost the same way than the absolute yields of the Italian curve. Conversely, in 2H2017, the spread with the benchmark 10-year German bond area recorded a greater increase than the reduction of absolute yields. Further than to the aforementioned reduction of certain risk factors perceived by investors, this was because German securities’ absolute yields recorded a slow but uninterrupted upward trend, rising from 0.20% to about 0.50%, mainly due to expectations of a further acceleration of the German economy.
CHART II.8: BTP-BUND, OAT-BUND AND BONOS-BUND SPREAD - 10-YEAR BENCHMARK (basis points) 250 Spread BTP-Bund Spread SPGB-Bund Spread FRTR- Bund 200
150
100
50
0
Performance in secondary market
General remarks In 2017, the government bond secondary market was affected not only by the above mentioned national and international economic and political events, but also by specific factors of the Italian economic and political context. Further issues were related to the Italian market architecture (as the role of Market Making, the features of the Future market, the role played by the Repo and strip markets) and to the interaction with primary market (regularity and continuity of issuance of benchmark bonds on several points on the curve). Finally, it must be remembered the role played by ECB in 2017, through its program for government bond purchases. The program is characterized by regular, predictable, sufficiently transparent purchase procedures. It is extended to every maturity of the government curve up to the 30-year point while also including, since 2017, bonds with a residual life higher than one year, instead of two as previously in force. The ECB, mainly through the national central banks, carried out this activity in a very effective way, albeit reducing, since April, the total monthly purchase volume from € 80 billion to € 60 billion. Indeed, no securities’
MINISTRY OF ECONOMY AND FINANCE 33 2017 PUBLIC DEBT REPORT
shortages which could endanger secondary market liquidity were observed12, also thanks to the mechanism of Repo facility. As shown in the following Chart II.9, this has supported demand for long-term bonds, driving down short-term yields at an all-time low. Consequently, the yield curve for Italian government securities markedly steepened in 1H2017, then slightly attenuated, but not in the shorter-term end, where negative yields continued to decrease.
CHART II.9: YIELD CURVE IN SECONDARY MARKET 5.0%
4.0% 3.56% 3.31% 3.02% 3.41% 3.22% 3.0% 2.73% 3.36% 2.44% 2.91% 2.16% 2.61% 2.94% 2.30% 2.66% 2.0% 2.00% 2.39% 1.38% 2.11% 1.84% 0.87% 1.22% 1.0% 1.10% 0.71% -0.07% 0.62% 0.0% -0.41% -0.14% -0.58% -0.15% -1.0% -0.67% 3 month 2 year 5 year 7 year 10 year 15 year 20 year 25 year 30 year 50 year
End of december '16 End of June '17 End of December '17
Below are some distinctive features that have been observed in the government bond secondary market during 2017. As already observed in 2016, securities with maturities close to each other, but bearing very different coupons, continued to record different performances, especially in the curve segment starting from the 10-year point onwards. This is the so-called dislocation phenomenon between high- and low-coupon bonds by which, mainly during long phases of risk aversion, investors prefer low-coupon securities, as these latter need lower investment than high-coupon bonds (the traded nominal value being equal). This phenomenon, in some cases, also resulted in a renewed and more dynamic activity on the strip bonds’ market13, which, by definition, are zero coupon bonds and which are sought after precisely to have a market price below par. A further particularly noticeable phenomenon observed in 2017 was the wide influence of the Future market on the prices of Italian government securities,
12 The Repo facilities are monetary policy operations based on repurchase agreements. 13 Strips are zero coupon securities originating exclusively on the secondary market by separating coupons from the principal, which therefore have their own autonomy and are separately traded. It should be noted that the above does not have any effect on the issuer (the Treasury), which pays coupons and principal at the due dates of the original security without changes to the ordinary payment procedure.
MINISTRY OF ECONOMY AND FINANCE 34 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
since Futures are used by traders (both dealers and institutional investors) to "neutralize" risks stemming from long positions held not only on Italian government bonds but also on other highly correlated countries such as Spain, or, rarely, Portugal.
Interdealer wholesale market and contribution by Specialists in government bonds MTS Italia, the regulated platform accessible only by dealers and market makers (so-called interdealer market) is the platform through which the Treasury currently monitors and assesses a relevant share of the activity performed by Specialists in government bonds in the secondary wholesale market; as such, it is the main reference to assess developments in this market.
Cash market Volumes traded on the platform showed a rather volatile trend over the various months of 2017 and recorded a sensible reduction compared to 2016, mostly stemming from the first three quarters of the year (respectively -27%, - 21%, and -30% compared to the same quarter of the previous year) while recovering by over 37% in the last quarter (again, compared to the corresponding quarter of 2016). Therefore, trend in 2017 volumes traded on MTS was in some way opposite to that found in 2016, when political instability and banking crises had repercussions in the last quarter of the year. On the contrary 2017, as widely described above, was rather difficult at the start, due to unresolved domestic and European political issues, while the final months of the year were quite positive, due both to strong economic recovery - also coupled with the rating upgrade by Standard and Poor's - and to the dispel of uncertainties about the banking sector (Chart II.10). Absolute volumes traded in 4Q2017 exceeded € 415 billion (a figure that had not been recorded since before the sovereign debt crisis), reflecting the renewed interest in Italian government securities by investors who probably increased their position while having underweighted, until then, Italian government bonds in their portfolios. In 2017, however, volumes traded on the interdealer market amounted to about € 1,200 billion, a figure about 12% lower than 2016 and essentially in line with total volumes traded in 2015.
MINISTRY OF ECONOMY AND FINANCE 35 2017 PUBLIC DEBT REPORT
CHART II.10: MONTHLY TRADED VOLUMES ON THE MTS PLATFORM (€ million) 400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2016 2017
As regards the various sectors and with the exception of CCTeus and BTP€i, an overall decrease was recorded, reaching slightly below -10% for BTPs and more than -20% for BOTs and CTZs (Chart II.11). The BTP€i sector recorded in 2017 an excellent increase in terms of traded volumes, outperforming the 2016 figures by over 75%. The reasons underpinning this trend should not be only found in a gradual improvement of inflation expectations, but also in the support that the ECB, through its PSPP purchase program, has provided to this market segment, which had recorded very weak activity in the previous two years. Even the CCTeus, although at a definitely lesser extent, recorded increasing interest from investors, leading to about +20% on an annual basis. Such a performance in terms of increasing volumes is quite natural in contexts in which investors tend to maintain neutral or adverse positions to Italian risk and creditworthiness, since these securities - as all floaters - have defensive features and record lower volatility. Infra-annual volumes trend of the various segments replicates the overall volume pattern, thus declining on all sectors (with the exception of the BTP€i sector) in the first quarter, slightly recovering in the second quarter, and then again markedly declining in the third quarter in the short BOTs and CTZs sectors, and in the BTPs one. Last quarter, as mentioned for overall volumes, was exceptionally positive for all the sectors, with a change on all government bonds exceeding the previous quarter by 75% (over 37% compared to the corresponding quarter in 2016). Despite the decline in traded volumes, in 2017 the interdealer market of Italian government bonds has proved again to be a largely liquid and efficient market, although in several occasions or particularly critical market phases some rapid shortages of liquidity were recorded. This phenomenon proves that the ongoing ECB QE action has not substantially altered the price discovery process and market equilibrium, thus being essentially neutral as for the natural processes of price formation.
MINISTRY OF ECONOMY AND FINANCE 36 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
CHART II.11: QUARTERLY TRADED VOLUMES ON MTS, BY SEGMENT (€ million) 1°Q 2016 2°Q 2016 3°Q 2016 4°Q 2016 1°Q 2017 2°Q 2017 3°Q 2017 4°Q 2017 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 - BOT CTZ CCTeu BTP BTPi
Data about the maturity of traded securities shows that the decline in volumes in the first three quarters of 2017 was mainly focused on the short and very short maturity segments (i.e., BOTs, CTZs, and partially also the BTPs segment with a residual maturity of up to two years). Nominal and inflation- indexed securities (as well as CCTeu) with a residual maturity exceeding two years recorded broadly unchanged volumes, or just slightly lower for those ranging between two and six years. This situation was completely overturned in the last quarter when, as mentioned above, traded volumes jumped for all segments up to 12 years, although the higher increases were recorded in the shorter segments of the curve.
CHART II.12: MONTHLY TRADED VOLUMES ON THE MTS PLATFORM BY MATURITY (€ million)
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0 0-12mth 12mth-2y 2y-4y 4y-6y 6y-8y 8y-12y 12y-17y 17y-30y 1°Q 2016 2°Q 2016 3°Q 2016 4°Q 2016 1°Q 2017 2°Q 2017 3°Q 2017 4°Q 2017
It should be noted, however, that the 2Q2017 good trading performance on securities with a residual maturity between 4 and 8 years is also attributable to
MINISTRY OF ECONOMY AND FINANCE 37 2017 PUBLIC DEBT REPORT
the large participation of banks in the last TLTRO operation implemented by ECB, as a share of the new liquidity was used for investments in government bonds with a duration at least equal to that of the TLTRO itself. In order to assess the general trend of liquidity on the secondary market, many metrics can be adopted, each of which highlights specific phenomena from its own perspective, since the concept of liquidity is wide and encompasses different points of view. The most common metric, which for its simplicity and immediacy allows obtaining a first and immediate assessment of the phenomenon, is the bid-ask spread, that is the difference between the prices quoted for a purchase and a sale of each security traded on the market. The lower the size of the bid-ask spread, the higher the liquidity of the security. Graphical representations of the performance of this metric for a series of maturities are provided below. The liquidity deterioration which had occurred at the end of 2016 partially affected the early weeks of 2017, and then bid-ask spreads slowly returned to the 2016 average levels especially on short segments, while spreads have remained at rather low levels on long-maturity securities. As can be seen, in fact, from the Charts II.13.a, 13.b, and 13.c, bid-ask spreads reached their peak in December 2016, kept very high levels even in January and February, then begun a path of near-continuous reduction, albeit very gradually. By the end of 2017, for the CCTeu, CTZ, and 10-year BTP segments, figures were basically normalized compared to 2016 average, while standing at slightly higher levels on all other segments. Another important point that can be observed in the following Charts is that on the BTP segments bid-ask spreads (expressed in basis points to allow comparison among different maturities) are constantly lower for maturities of 30 and 50 years than for maturities of 15 and 20 years. This particular feature proves that in 2017 the ultra-long end of the Italian government bonds curve was very well supported by final investors demand.
CHART II.13.a: BID/ASK SPREAD IN BASIS POINTS ON 10, 15, 20, 30 AND 50 YEARS BENCHMARK BTP, RECORDED ON THE MTS PLATFORM
4.0
3.5
3.0
2.5
Basis point Basis 2.0
1.5
1.0
0.5
0.0
BTP 10y BTP 15y BTP 20y BTP 30y BTP 50y
MINISTRY OF ECONOMY AND FINANCE 38 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
CHART II.13.b BID/ASK SPREAD IN BASIS POINTS ON CTZ, CCTeu, BTP 3, 5 AND 7 YEARS BENCHMARK, RECORDED ON THE MTS PLATFORM
3.0
2.5
2.0
1.5
1.0 Basis points Basis
0.5
0.0
CCTeu CTZ BTP 3y BTP 5y BTP 7y
In 2017, the inflation sector showed signs of recovery not only as for traded volumes (which, as previously mentioned, approximately increased by 75% compared to 2016), but also as for bid-ask spread trends. In fact, during 2016, bid- ask spread on the 5 and 10 years inflation linkers fluctuated on average around figures between 3 and 7 basis points. 2017 had started with a bid-offer equal to about 6 basis points on both maturities, then progressively reducing in 2017 and eventually shrinking well below 3 basis points. Therefore, under this liquidity monitoring and analysis profile, it should be noted that while average bid-ask spreads were some basis points broader in the inflation segment compared to the nominal one, this differential has considerably reduced, thus signalling a return to a properly functioning market.
CHART II.13.c: BID/ASK SPREAD IN BASIS POINTS ON BENCHMARK 5 AND 10 YEAR BTP€i, AS RECORDED ON THE MTS PLATFORM
8.0 7.0
6.0 5.0 4.0
Basis points Basis 3.0 2.0 1.0 0.0
BTP€i 5y BTP€i 10y
MINISTRY OF ECONOMY AND FINANCE 39 2017 PUBLIC DEBT REPORT
In order to measure liquidity on the secondary market it is also possible to adopt less common but more sophisticated metrics, allowing to take into account not only the size of price differentials as quoted in buy and sell, but also further aspects, such as price changes stemming from substantial transactions or the depth of quotations on both sides of the order book of each security14. It is in particular the slope, measuring the ratio between the absolute difference between the best and the worst quotation of a given security at a given moment and the difference between the overall volume of all the quotes in the order book of the security and the volume of the best quotation15. Represented as a graph, this ratio generates for each side of the order book - Bid and Ask- a straight line, highlighting the trend in the purchase and sale price based on the quantity asked for or offered by the market makers. The indicator therefore measures the marginal increase / decrease of the price that will be charged by the dealer to negotiate an additional unit with respect to the quantity listed on the best price. Therefore, the relationship between slope and liquidity of the market is clear: the higher the indicator (i.e. the higher the slope of the line), the lower the liquidity of that bond. In order to get a picture as complete as possible and in order to get the slope of a bond for a trading day, the slope is calculated referring to many single moments of the same day, and an average of these snapshots is calculated to build the daily slope dataset.
CHART II.13.d: DAILY SLOPE ON 10 YEARS BENCHMARK BTP (logarithmic scale) RECORDED ON THE MTS PLATFORM
0.50
0.05
14 The order book is the set of transaction proposals for a given security, as collected on the market at a certain moment and listed by purchase and sale proposals, respectively in decreasing and increasing order. 15 Slope is conceptually very similar to "price impact" even if the slope is a metric calculated on the basis of purchase or sale proposals while the price impact is based both on price proposals and on trading activity. The price impact, in fact, measures the relationship between a purchase or sale order and the related price change in quotation. However, relevant literature highlights that calculating this metric is not only rather complex (as it requires a huge amount of intraday data), but also entails a subjective assessment of some key figures including: the threshold beyond which to evaluate the impact of the trade on the price; the time lag within which the price change is to be considered as due to the transaction; etc.
MINISTRY OF ECONOMY AND FINANCE 40 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
2017 trends of this indicator provide additional information compared to the most immediate bid-ask spread. Indeed, despite underlying trends were rather similar, as signalling a steady improvement of liquidity conditions, peaks recorded on the slope are different from those recorded on bid-ask spreads. As for the slope, the most evident reduction in liquidity occurred during political and banking concerns in June and July and then again close to year-end. At that time, indeed, all uncertainties both political (internal and international) and regulatory (since 2 January 2018 all markets and intermediaries would apply the new MIFID2 framework) were amplified by the usual reduction of liquidity caused by the closure of banks’ fiscal period and lower activity of investors, both institutional and final.
The Repo segment The market of repurchase agreements on government securities (a.k.a. the Repo market) plays a key role in supporting an orderly trading on the spot market, since an efficient Repo market allows traders (mainly market makers) to ensure a steady presence in bid / ask prices on all securities, even when they do not hold the bonds in their portfolios. Over the last few years, EU legislation has intervened on several occasions and in various areas in order to revise regulation and supervision rules of intermediaries and financial markets. Many issues of these regulatory actions affected the Repo market16 activity, making it more expensive. Nevertheless, volumes traded in 2017 substantially increased (roughly +18%) compared to 2016. Market makers accounted for a considerable share of total traded amounts, although it should be also mentioned that liquidity of the segment is underpinned by the participation of a strongly broader group of traders than that of dealers operating in the cash (i.e. spot) segment. As for the type of traded contracts, all the main contractual categories recorded growing volumes compared to 2016. Larger increases occurred on overnight and Spot/Next agreements (+23% and +22% respectively), while the amounts traded under the Tomorrow/Next agreements recorded an increase lower than 10% (Chart II.14)17.
16 The more recent intervention that attracted the attention of traders for possible negative effects on the Repo market concerns the future implementation of NSFR (acronym for Net Stable Funding Ratio). It is a new liquidity requirement to be met, aiming to encourage banks to limit any liquidity imbalance between their sources of funding and the ways in which these sources are used for the disbursement of loans. In particular, as for the issues covered in this Report, traders’ concerns point to the regulatory asymmetry which, should the projected rules remain unchanged, would exist among the procedures with which, for transactions with a duration lower than 6 months, collateralized lending (or Repo) and collateralized financing activities (or Reverse Repo) respectively would be included in calculation of ASFs – Available stable funding without being included in the calculation of the RSFs – Required stable funding (or vice versa). 17 A Tomorrow / Next contract begins the first day following the signing and ends the next working day, a Spot / Next contract begins on the second day following the signing and ends on the next working day; an overnight contract begins the day of signing and ends the next working day.
MINISTRY OF ECONOMY AND FINANCE 41 2017 PUBLIC DEBT REPORT
CHART II.14: MONTHLY TRADED VOLUMES ON THE MTS PLATFORM BY CONTRACT MATURITY (in euro million)
1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2
0.0
3/2017 2/2017 8/2017 1/2017 2/2017 4/2017 5/2017 6/2017 7/2017 8/2017 9/2017 1/2017 3/2017 4/2017 5/2017 6/2017 7/2017 8/2017 9/2017 1/2017 2/2017 3/2017 4/2017 5/2017 6/2017 7/2017 9/2017
10/2017 11/2017 12/2017 10/2017 11/2017 12/2017 10/2017 11/2017 12/2017 Overnight Spot/Next Tomorrow/Next
Specialists in Government bonds on the platform selected for their assessment The Specialists held an overwhelming share (near to 90%) of total traded volumes on the MTS platform18, i.e. the trading platform selected for their assessment. The remaining portion is mainly traded by other market makers (not Specialists)19, whose share gradually decreased over the years, from around 16% in 2012 to less than 10% in 2017. A residual quota of less than 1% was traded by dealers other than Market Makers.
CHART II.15: ANNUAL VOLUMES TRADED BY SPECIALISTS ON MTS PLATFORM (%)
100 SPECIALISTS MARKET MAKERS (OTHER THAN SPECIALISTS) OTHER TRADERS 90 80 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
18 MTS, as said, is an interdealer platform, where intermediaries only are allowed to trade, not final investors. 19 Pursuant to art. 1 paragraph 5-quater of the TUF, for "Market maker" is meant a subject who proposes itself on an on-going basis, on the trading venues and / or outside them, as willing to negotiate on its own account by buying and selling financial instruments as a direct counterparty, at the prices it quotes. Being qualified as a Market maker is one of the mandatory requirements to be eligible as a Specialist pursuant to art. 23 paragraph 1 of the Ministerial Decree n. 216 of 2009.
MINISTRY OF ECONOMY AND FINANCE 42 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
Specialists in government bonds trading activity with final investors
Traded volumes Specialists play an important role not only by ensuring liquidity to the inter- dealer market, but also by channelling to final investors the securities purchased on primary market. Therefore, analyses of traded volumes and of purchase/sale flows by type of investor and by geographic area are paramount to DMOs, allowing to understand who the investors are and what they ask for in a given market context. This essential monitoring and analysis activity is based upon information gathered through the EMAR20, a highly-standardized, EU-shared reporting model, drawn-up by the Specialists and systematically registering all activities performed with any counterparty, including final customers. This report includes transactions concluded both through trading platforms and on a bilateral basis, both in electronic and voice trading format. Since 2014, this report include all information on individual trading made by Specialists (report trade by trade) by listing, for each trade, the security, the quantity, the country in which the counterparty has its registered office, the type of counterparty, and the trading platform or method. Unlike to the MTS regulated platform, on which volumes traded in 2017 reduced, volumes traded on other electronic and non-electronic platforms recorded a significant recovery in 2017, especially in the central part of the year (Chart II.16), as increases accounted at about 30% in the second quarter and 15% in the third quarter.
CHART II.16: MONTHLY VOLUMES TRADED BY SPECIALISTS ON PLATFORMS OTHER THAN MTS (in euro millions)
400,000 2016 350,000 2017 300,000
250,000
200,000
150,000
100,000
50,000
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
20 The European Market Activity Report replaced the former HRF - "Harmonized Reporting Format"- but essentially it remained unchanged.
MINISTRY OF ECONOMY AND FINANCE 43 2017 PUBLIC DEBT REPORT
The above differing trends can be attributed to the fact that, in times of greater market volatility, traders increasingly operate by non-electronic trading, thus leading to a partial shift of their activity on facilities other than MTS.
Trades by type of counterparty As previously mentioned, information obtained through the EMAR reports has gained considerable value (namely since 2014, when the trade-by-trade format has been introduced), as it allows in-depth analysis on the dynamics of government securities investors. By aggregating information featured in these reports, it is possible to monitor trends by segment, by geographical area, by investor type, as well as the liquidity recorded on the various trading platforms. With regard to the evolution of demand by type of investor, the following Charts show the trend of absolute volumes and net amounts (purchases less sales) traded with Specialists by main investor categories - banks, investment funds, pension funds, insurance companies and hedge funds. Even in 2017, as shown in Chart II.16, investment funds and banks were the main investors in government bonds, both in terms of absolute volumes and net purchases flows. However, compared to previous years, actual contribution of banks as net buyers was sharply lower. In fact, excluding first quarter, when the ECB TLTRO-II operation probably played a decisive role, the remaining quarters recorded virtually null net purchases by banks. While foreign banks’ net purchases were steady in each quarter averaging around € 8 billion, Italian banks average was null, as stemming by a positive first quarter of about € 20 billion followed by a similar negative amount in the remaining three, mainly in the last quarter. Investment funds, instead, provided positive net flows of about € 20 billion per quarter. Pension funds and insurance companies, although maintaining steady trading flows in absolute terms, contributed slightly to overall transactions. In net purchases / sales terms, while the first quarter showed negative net flows and the second was neutral, the 2H2017 recorded positive volumes, eventually compensating the negative trend of the first two quarters. Finally, as regards hedge funds, it should be noted that this sector has gradually increased its share of total carried out transactions, peaking at 18% of total trades with final customers in 2Q2017. Given these investors’ nature, net flows recorded in the various quarters were quite unstable and unable to account for a positive or negative overall net demand in 2017.
MINISTRY OF ECONOMY AND FINANCE 44 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
CHART II.17: QUARTERLY VOLUMES TRADED BY SPECIALISTS BY TYPE OF COUNTERPARTY (€ million) – FUND MANAGERS, BANKS, PENSION AND INSURANCE FUNDS, HEDGE FUNDS
350,000 40,000
300,000 35,000 30,000 250,000 25,000 200,000 20,000 150,000 15,000 100,000 10,000 50,000 5,000 0 0 IQ 2016 IIQ 2016 IIIQ 2016 IVQ 2016 IQ 2017 IIQ 2017 IIIQ 2017 IVQ 2017 Investment Funds:Turnover Investment Funds: net purchased amount (RHS)
140,000 14,000 120,000 12,000 100,000 10,000 80,000 8,000 60,000 6,000 40,000 4,000 20,000 2,000 0 0 -20,000 -2,000 -40,000 -4,000 -60,000 -6,000 -80,000 -8,000 -100,000 -10,000 IQ 2016 IIQ 2016 IIIQ 2016 IVQ 2016 IQ 2017 IIQ 2017 IIIQ 2017 IVQ 2017 Hedge Funds:Turnover Hedge Fund: net purchased amount (RHS)
300,000 30,000 25,000 250,000 20,000 200,000 15,000 10,000 150,000 5,000 100,000 0 -5,000 50,000 -10,000 0 -15,000 IQ 2016 IIQ 2016 IIIQ 2016 IVQ 2016 IQ 2017 IIQ 2017 IIIQ 2017 IVQ 2017 Banks: turnover Banks: net purchased amount (RHS)
24,000 4,800 21,000 4,200 18,000 3,600 15,000 3,000 12,000 2,400 9,000 1,800 6,000 1,200 3,000 600 0 0 -3,000 -600 -6,000 -1,200 -9,000 -1,800 -12,000 -2,400 -15,000 -3,000 IQ 2016 IIQ 2016 IIIQ 2016 IVQ 2016 IQ 2017 IIQ 2017 IIIQ 2017 IVQ 2017 Insurance/Pension Funds: turnover Insurance/Pension Funds: net purchased amount (RHS)
MINISTRY OF ECONOMY AND FINANCE 45 2017 PUBLIC DEBT REPORT
Trading by geographical location of counterparties Available 2017 data allows to detect some differences of behaviour compared to 2016 (see Chart II.17) with regard to the evolution of demand by geographical area, divided into Italian and foreign investors. Italian investors traded volumes in line with the figures of last quarters of 2016, i.e. for total volumes of around € 200 billion per quarter. Italian net purchases flows gradually decreased compared to 2016, reaching an average slightly lower than € 15 billion on a quarterly basis. With regard to foreign final investors, quarterly absolute traded volumes showed a slightly increasing trend compared to 2016. However, the most interesting aspect to highlight is the trend of net purchase flows which, compared to 2016, showed for these latter investors a marked increase, reaching an average of around € 25 billion a quarter.
CHART II.18: QUARTERLY VOLUMES TRADED BY SPECIALISTS BY GEOGRAPHICAL LOCATION OF THE COUNTERPARTY (€ million)
350,000 35,000 300,000 30,000 250,000 25,000 200,000 20,000 150,000 15,000 100,000 10,000 50,000 5,000 0 0 -50,000 -5,000 IQ 2016 IIQ 2016 IIIQ 2016 IVQ 2016 IQ 2017 IIQ 2017 IIIQ 2017 IVQ 2017 Italy:Turnover Italy: net purchased amount (RHS)
500,000 50,000 450,000 45,000 400,000 40,000 350,000 35,000 300,000 30,000 250,000 25,000 200,000 20,000 150,000 15,000 100,000 10,000 50,000 5,000 0 0 IQ 2016 IIQ 2016 IIIQ 2016 IVQ 2016 IQ 2017 IIQ 2017 IIIQ 2017 IVQ 2017 Foreign: Turnover Foreign: net purchased amount (RHS)
MINISTRY OF ECONOMY AND FINANCE 46 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
Evolution of the BTP Future market
The far more liquid Future contract on Italian government securities is on the 10-year maturity21, whose 2016-2017 trend in quotations is shown in the following Chart II.19. It can be easily noticed that the Future price trend has been perfectly correlated with the performance of the 10-year benchmark BTPs, although events leading to a larger oscillation of the Future than that of the underlying security were not uncommon.
CHART II.19: PRICE TREND OF BTP FUTURE AND BTP BENCHMARK WITH 10 YEARS MATURITY (right-hand reversed scale in%)
150 1
145 1.5
140 2
135 2.5
130 3
125 BTP Future 10y 3.5 Yield btp 10y (RHS) 120 4
In addition, in 2017, the 10-year Future contract on BTP has established as a reference contract, used by traders to cover their positions not only on underlying Italian securities, but also on other government securities highly correlated with Italian bonds. In terms of traded amounts, there are no major differences compared to 2016. However, it is interesting to observe how, compared to 2016, the level of open interest22 has recorded, in a very clear way, a steady rise throughout 2017, except sharp reductions in connection with the roll23 of the contract (Chart II.20).
21 Future Contracts on BTPs are traded on the Eurex platform. 22 The open interest represents the number of current Future contracts - and therefore not yet closed - that are traded on the market. It can be defined as the sum of all long or short positions opened on 10-year BTPs by means of Future contract in a given moment. Strong rise phases normally indicate a trend in the same direction of a large share of traders. 23 The roll (or rollover) is the operation by which a Future contract near to maturity is closed, to open a corresponding transaction on a Future contract expiring later.
MINISTRY OF ECONOMY AND FINANCE 47 2017 PUBLIC DEBT REPORT
CHART II.20: TRADED AMOUNTS AND OPEN INTEREST OF THE BTP FUTURE CONTRACT NEGOTIATED ON THE 10-YEAR MATURITY ON THE EUREX MARKET
Traded amount Open Interest 500,000
400,000
300,000
200,000
100,000
0
The Future has proved to be used by BTPs holders as a means of hedging against risks. Therefore, being used as a tool for overall reduction of risks stemming from a government bonds investment portfolio, it underpins the purchase of Italian issues by an increasingly wide pool of investors.
Performance of Italian sovereign Credit Default Swap
CHART II.21: PRICE TREND OF CDS ($) ON ITALIAN DEBT AT 5 YEARS MATURITY AND OF THE 5 YEARS BTP-BUND SPREAD (basis points)
200 180 160 140 120 100 80 60 40 20 0
ITALY CDS USD SR 5Y D14 Corp Spread 5Y BTP
In 2017, price trend of the Credit Default Swap (CDS) on Italian sovereign bonds on the 5-year maturity (quoted in USD), as shown in Chart II.21, recorded a similar trend to that of the BTP-Bund spread on the same 5-year maturity, widening in 1Q2017 and then narrowing throughout the rest of the year. It should
MINISTRY OF ECONOMY AND FINANCE 48 II. TREND OF THE ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK
be noted, however, that volatility of the BTP-Bund spread was lower than that of the CDS. In this sense, credit risk (actually embedded in both the Chart lines) seems to be lower on the bond market than in the derivative contract. A possible explanation could be the steady and large-size ECB purchase action, generating clear curbing and stabilization effects on yield spreads between the securities involved in the purchase policy.
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MINISTRY OF ECONOMY AND FINANCE 50
III. PUBLIC DEBT MANAGEMENT IN 2017
III.1 GENERAL GOVERNMENT DEBT’S OUTSTANDING AMOUNT
General government1 consolidated debt encompasses liabilities related to this sector, recorded at nominal value. Calculation of this aggregate is based on sectorial and methodological criteria as defined, first of all, in the EU Regulation 549/2013 concerning the European System of National and Regional Accounts (ESA2010) and, more specifically, in the EC Regulation 479/2009 relating to Excessive Deficit Procedure (EDP), as amended by Regulations 679/2010 and 220/2014. Financial liabilities to be encompassed include deposits and currency, bonds and loans. The General government is divided into the following subsectors: central government, local government and social security funds. Debt liabilities that at the same time are an asset to other bodies belonging to General government are eliminated in the consolidation process. Thus calculated, debt reached about € 2,263 billion at the end of 2017, increasing by about € 44 billion over the year. This figure is affected by measures aiming to support Italian distressed banks, including not only financial resources actually spent for this purpose, but also an additional € 7 billion that Eurostat has deemed to be classified as non-negotiable loans. With regard to GDP, growth was 2.1% in nominal terms, while 1.5% was the change in real terms. Therefore, according to Bank of Italy estimates, debt accounted for 131.8% of GDP on December 31 2017, declining by about 0.2% compared to the end of 2016, increasing by 0.3% compared to 2015 and a being basically stable compared to 2014.2 Debt consisting of tradable securities (both of the Central and local government) stood at 84.5% of total consolidated debt as of December 31, 2017, substantially in line with the same figure for 2016, of which 94.4% consisting of medium-long term bonds. Almost all of these securities are issued by Treasury. Non-marketable debt, represented by loans, accounted for around 7.9% of the total debt.
1 The source for this aggregate is represented by the statistical publications of the Bank of Italy. 2 In fact, ISTAT (the Italian National Statistical Institute) in September 2018 revised the GDP of recent past years, and the evolution of debt to GDP ratio changed as follows: 131.8% in 2014, 131.6% in 2015, 131.4% in 2016, 131.2% in 2017.
MINISTRY OF ECONOMY AND FINANCE 51 2017 PUBLIC DEBT REPORT
CHART III.1: TREND OF DEBT-TO-GDP RATIO 140% 131.8% 131.5% 132.0% 131.8% 129.0% 130% 123.3% 120% 115.4% 116.5% 112.5% 110% 102.6% 102.4% 101.9% 99.8% 100%
90%
80%
70%
60% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
As for 2014 to 2017 figures, also refer to note 2
As mentioned in previous chapters, this report focuses on debt consisting of government securities, as well as on management goals and actions carried on in 2017. It should be noted that government securities issuances are made to cover borrowing requirement of the State sector, an aggregate essentially overlapping with the Central government, except for some limited exceptions, such as ANAS S.p.A., which ISTAT includes within the Central government, while it is not included in the State sector. Net issues limit, annually set in the Budget Law, is calibrated according to the State sector borrowing requirement, taking into account all redemptions and new issues (short, medium and long-term), these latter recorded at real values (net proceeds).
III.2 ACTIVITY IN GOVERNMENT SECURITIES
Maturities and redemptions of government securities Government securities maturing in 2017 amounted to € 368,293 million; this amount does not include securities withdrawn from the market in debt exchange and buyback transactions. However, an additional € 175 million should be added to this amount, stemming from a yen bond whose holders had an early redemption option in 2017, which was actually claimed. Thus, total redemptions amount - net of debt exchanges and buybacks - reached € 368,468 million, a 6.7 percent increase compared to the € 345,194 million 2016 figure. In the short-term segment, maturing BOTs amounted to € 152,113 million, a progressively decreasing figure compared to both 2016 (€ 160,655 million) and 2015 (slightly below € 174,552 million). In the medium/long-term end, 2017 total redemptions (net of debt exchanges and buybacks) reached € 216,355 million, divided into domestic securities for € 212,998 million and foreign securities for € 3,357 million. Therefore, this segment recorded a significant increase compared to 2016, when the equivalent figure had
MINISTRY OF ECONOMY AND FINANCE 52 III. PUBLIC DEBT MANAGEMENT IN 2017
been € 184,539 million, of which € 176,385 million for domestic securities and € 8,154 million for foreign securities. An additional € 11,657 and € 9,878 million were respectively repurchased in debt exchanges and buybacks of securities maturing from 2018 onwards and including CTZs, BTPs, BTP€is and CCTeus. Therefore, the total figure of securities redeemed in 2017 amounted to € 390,015 million. However, since financial resources available at the Sinking Fund were used for € 599 million, 2017 actual outflows for debt redemption charged to ordinary budget items amounted to € 389,416 million.
Bond net issues and funding of Central Government borrowing require- ment Net issues3 of the year, i.e. total cash funded by placing government bonds, amounted to € 41,150 million, about € 11 billion lower than General government cash balance (€ 52,159 million) published in public finance official documents4. Treasury liquidity, about € 13,7 billion down, funded the share of the State Sector’s cash balance not covered by net issues of government securities and by net balance of other forms of borrowing. These latter, which amounted to a net negative amount of about € 2,700 million, are financial debit items, other than government bonds, such as approximately € -950 million due to redemptions of Postal saving bonds (Buoni Postali Fruttiferi), to which must be also added the changes in balance of the Treasury accounts held by subjects outside the General government (approximately € -760 million)5 and other financial liabilities (approximately € -1 billion).
3 Net issues are calculated by using the difference between issues and redemptions, respectively accounted as follows: issues at net proceeds, excluding BOTs that are accounted for at face value (price 100) as the difference compared to 100 is paid in advance by the State Treasury; redemptions are accounted at their face value, with the exception of securities repurchased in debt exchanges, which are taken in account at net proceeds, as well as the CTZs, since the interest component is already accounted in the Central government’s borrowing requirement; finally, redemptions funded with the Sinking Fund (equal to € 599 million) are obviously not included. 4 This value is obtained starting from the budget and treasury administration balance (€ 52,514 million), adjusted to take into account of certain items which, although not altering the available liquidity, affect the change in the public debt and contribute to the formation of borrowing requirement. In particular, to the budget and treasury balance some debit items must be added that do not result in actual cash movements, although they do change certain accountings in the State budget or treasury. 5 The change in the balance of the Treasury account registered to Cassa Depositi e Prestiti was positive by about one billion, but this increase was more than offset by the changes in the balance of other accounts held by entities outside the General Government
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TABLE III.1: ISSUES, MATURITIES AND FUNDING OF CENTRAL GOVERNMENT BORROWING REQUIREMENT (€ million) 2017 Nominal issues (*) 427,059 Nominal redemptions (*) 390,015 Issues net proceeds (*) (a) 431,990 Redemptions aimed at calculation of net issues (*) (b) 390,840 Net issues (*) (c) = (a) - (b) 41,150 Other forms of funding held at State Treasury (f) = - (d) + (e) - (c) -2,675 Total funding (c) + (f) 38,475 Central Government Cash Balance (d) -52,159 Change in Treasury’s Cash Account 12-31-2017 vs 12-31-2016 (e) -13,684 (*) Calculated for the full year using settlement date, not auction date.
Issuances management Issuance strategy set by Treasury for 2017 had to take into account higher financing needs than in most recent years: as already mentioned, indeed, in the medium and long-term segments an additional € 30 billion were scheduled to mature compared to 2016, to which annual cash requirement ought to be added, as usual. In facing this substantial borrowing requirement and in order to continue to ensure a properly functioning of government securities secondary market, the Treasury made use of a broad and diversified offer of available debt instruments, with an increasing presence on the longer-term sectors, also taking advantage of the two new nominal 20 and 50 year BTP lines, firstly introduced in 2016. Total volume of government securities issued in 2017 reached € 413,684 million net of debt exchanges, a 3.56% increase compared to € 399,449 million issued in 2016.
TABLE III.2 – GOVERNMENT SECURITIES ISSUED NET OF DEBT EXCHANGE OPERATIONS (€ million) Total I Quarter II Quarter III Quarter IV Quarter Total 2016 2017 2017 2017 2017 2017 Short-term totals 152,694 46,398 39,000 38,442 27,760 151,601 (BOT) Medium-long term 246,756 76,349 82,329 52,215 51,190 262,084 totals of which: CTZs 18,991 8,250 8,354 6,156 5,900 28,660 BTPs 170,219 54,580 52,457 37,660 28,458 173,155 BTP€is 12,422 5,469 3,706 2,938 1,438 13,550 BTPs ITALIA 13,234 0 8,590 0 7,107 15,697 CCTeus 28,854 8,050 9,223 5,463 8,288 31,023 Foreign securities 3,036 0 0 0 0 0 TOTAL 399,449 122,747 121,329 90,657 78,950 413,684
Prior to provide details about funding activity on the market, it should be noted that borrowing requirements do not follow a regular pace during the year. In a standard scenario, expenses significantly exceed revenues up to May, while from the second half of June until August tax payment deadlines lead to a surplus in revenues, significantly increasing State's liquidity buffer. From September to November expenses sharply outpace revenues, then drying up the liquidity buffer that is eventually replenished by the year-end fiscal payments. These fluctuations allow to avoid issuing in some auction cycles characterized by lower liquidity on
MINISTRY OF ECONOMY AND FINANCE 54 III. PUBLIC DEBT MANAGEMENT IN 2017
government securities secondary market, as in mid-August and mid-December. Sometimes, some auctions at the end of November are also cancelled, due to the need to stick to the net issuance ceiling set in the Budget Law or should lack any cause of concern in the scheduled profile of maturities of the first months of the following year. In 2017, in particular, further than the usual cancellation of mid- month auctions of medium and long-term bonds in August and December, the 5- year BTP was not issued at the end of November.
Domestic bonds
BOT Over the last few years, a progressive reduction was recorded in offered BOTs amounts, in the view for a strategic reduction of short-term issues aimed at extending average debt life. By contrast, Guidelines for 2017 set a slight change in trend, by setting increasing issues due to substantial redemptions scheduled in the year. However, market conditions continued to favour the placement of longer-term securities, thus leading to a percentage weight of BOTs on total issues at levels comparable to those recorded in the previous year. In continuity with the past few years, the Treasury planned to issue the traditional 6-month and 12-month lines, while 3- month or flexible maturities could only be issued in the event of specific cash requirements. No modification occurred in auction procedures, in which traders bid in terms of yield (as usual in monetary market practice), as well as in issuance calendar and in the percentage of reopening reserved to Specialists, kept at 10% of the amount offered in the ordinary auction. Also in 2017 the Treasury retained the right to modify this percentage in each auction, but only in exceptional cases, due to particular market conditions and demand from traders, which however did not occur. Compared to the hypotheses underlying the Guidelines, gross and net issues made by Treasury in 2017 were basically in line with those of the previous year, thanks to better-than-expected cash balance allowing to face significant redemptions without the need for an increase in short-term issues. In 2017, € 151,601 million BOTs were issued, compared to € 152,694 million in 2016, with a marginal reduction in the placed amount. Gross issues for the two maturities were slightly higher on the annual security (€ 75,000 million for 6- month BOTs and € 76,601 million for 12-month BOTs). Net issues were negative for the 6-month security (€ -1,088 million), while positive for the 12-month one (€ +576 million), meaning a total reduction of € 512 million for the entire sector. No auction of 3-month or flexible BOT took place during the year. Therefore, total amount of outstanding BOTs reached a 5.59% share on total government securities at the end of the year, marginally decreasing compared to the previous year (5.74% in 2016), within the target ranging from 3% to 8% set in the Framework Decree for 2017. ECB's expansionary monetary policy continued to deploy its effects in 2017 as well, helping to keep short-term rates at historically low and largely negative levels, thus also affecting auction average yields. As in the previous year, all
MINISTRY OF ECONOMY AND FINANCE 55 2017 PUBLIC DEBT REPORT
placements recorded average auction yields below zero for both maturities. Weighted average yield had a downward trend similar on both the lines, repeatedly recording new historical lows. More in detail, the 6-month BOT recorded its highest yield in the auction settled at the beginning of January (- 0.286%) while the lowest (-0.457%) was recorded in the end of November auction, also marking the lowest ever level on this line. The 12-month BOT performance followed a similar path: the highest yield was recorded in mid-March auction (- 0.226%), then gradually decreasing to an all-time low in December (-0.407%). Despite the steady drop in yields, demand from intermediaries remained unceasing throughout the period and even strengthened in 2H2017. Increase in demand can be detected by changes in bid-to-cover ratios. While offered amounts stayed stable compared to 2016, bid-to-cover ratios averaged 1.72 for 6-month BOTs and 1.80 for 12-month ones, compared to 1.65 and 1.60 respectively in the previous year. Data periodically submitted by Specialists in government bonds about the 2017 geographical origin of auction demand for BOTs allow to detect considerable seasonal fluctuations in domestic demand, yet with a rising average. Then, a trend towards a gradual reduction of European participation was observed, counterbalanced by an increase in the Asian component, while the American share remained negligible. Thus, overall demand from foreign investors stuck at over 70% of the total. With regard to the type of investors in this market segment, banks and fund managers continued to be the main buyers; compared to 2016, there was also a greater presence of central banks and other public institutions and, to a lesser extent, of hedge funds. As mentioned, demand increased in the second half of the year, although at that time yields had fallen even below the deposit facility rate, which constitutes the floor of the remuneration of bank and government deposits held with the Central Bank. It is reasonable to assume that this phenomenon is due to the search for securities to be used as a collateral on the Repo market by financial intermediaries.
CHART III.2: YIELDS AT AUCTION OF 6- AND 12-M BOTs (percentage points)
6 m. 12 m. 0.20
0.10
0.00
-0.10
-0.20
-0.30
-0.40
-0.50
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Among the factors that led to a further lowering of yields in negative territory, it should be mentioned ECB's decision to keep official monetary policy rates unchanged for a long period and the continuation of ECB’s government securities purchase program. The latter, although not involving securities with a residual maturity of less than one year, produces externalities also on the BOTs sector. To assess the performance of the short-term sector in relative terms, compared to the main money market reference rates, the weighted average yield at auction may be compared with the interbank market rate for the same maturity, as recorded on the Euribor curve on the auction days. The following Chart III.3 shows that throughout 2017 the curve for 6-month BOTs remained below the corresponding Euribor, highlighting a reduced credit risk for Italian Treasury bills.
CHART III.3: 6-M BOTS SIMPLE YIELD AND 6-M EURIBOR 0.00 -0.05 6 m BOT simple yield 6 m Euribor -0.10 -0.15 -0.20 -0.25 -0.30 -0.35 -0.40 -0.45 -0.50
CTZ In the 24-month segment, CTZs issuance came back to a monthly pace, after the bimonthly frequency adopted in 2016. This decision made it possible to better deal with potential volatility, improving the segment liquidity. It also allowed to take into account recent changes in the ECB's asset purchase program eligibility criteria which - by accepting sovereign securities with a residual maturity from 1 to 2 years - made also CTZs available for purchase. Placements of 24-month CTZs increased by over 50%, from € 18,991 million in 2016 to € 28,660 million in 2017, while maturing amounts decreased by around € 2 billion as a result of the policy pursued in the most recent years aimed at reducing issuance in the short-term segment. During the year, the security started at end- November 2016 was reopened until April and reached an outstanding of € 15,1 billion. Two new securities were launched: in May the CTZ maturing on May 30, 2019, then reopened until the end-September auction, with a final outstanding of around € 12,2 billion; in October the CTZ maturing on October 30, 2019, which recorded an outstanding of € 5,9 billion at year-end.
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Average bid-to-cover ratio confirmed market appreciation for the increased issuance frequency, being significantly better than in 2016 (1.81 versus 1.60) and also showing greater stability, albeit amidst fluctuations: the lowest coverage ratio, recorded in the June auction, was 1.56, while the highest was in November, with a 2.19 figure. Furthermore, the inverse correlation between offered volumes and bid-to-cover ratios seemed to have diminished in 2017. Indeed, even in May and October auctions, when a new security was launched with a higher offered amount than the other tranches, this ratio remained quite high, even recording the second highest value of the year (2.02) in October. The geographical origin of demand showed several fluctuations, as periods of prevailing domestic demand were followed by others with a stronger foreign component, mostly European, even though a small American share was also recorded in the first part of the year. The composition of demand by type of investor showed great variability, as largely dominated by banks at first, but then balanced by a significant presence of investment funds, a modest share of hedge funds and, at year-end, a not negligible component of insurances. Similar to BOTs, yields at issuance on 24-month maturity were negative, with only a slight rise above zero in the February auction, as markets were in a concern phase and demand was searching for a safe-haven on the 2-year maturity of German government bonds, which in the same period was being traded at unprecedented low rates. CTZs reached an all-time low yield at issuance in November (-0.337%).
CHART III.4: YIELDS AT ISSUANCE ON CTZs IN 2017 (percentage rates) 0.20
0.10 0.029 0.00 -0.078 -0.10 -0.071 -0.075 -0.139 -0.085 -0.167 -0.20 -0.167 -0.160 -0.220 -0.30
-0.40 -0.337
-0.50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Total CTZ outstanding increased by € 1,085 million by the end of 2017, representing 2.13% of government securities stock, a fundamentally unchanged percentage compared to the previous year.
BTP In the nominal BTP sector, gross issues amounted to € 173,155 million, while in 2016 the Treasury had placed € 170,219 million. As for on-the-run securities, €
MINISTRY OF ECONOMY AND FINANCE 58 III. PUBLIC DEBT MANAGEMENT IN 2017
32,998 million were issued on the 3-year maturity, € 36,404 million in the 5-year segment, € 29,762 million in the 7-year segment, € 35,747 million in the 10-year one, € 10,434 million in 15-year bonds, € 5,400 million in the 20-year segment, € 10,980 million in the 30-year one and € 750 million in the most recent 50-year BTP segment. During the year, several re-openings of no longer being issued BTPs (off- the-run) were finalized, placing nine securities with a residual life between 3 and 29 years, for a total amount of € 10,680 million. Consistently with the Guidelines, at end-2017 the 3-year BTPs net issuances were positive and amounted to € 19,713 million, also due to the low maturing amount. In addition, taking into account the placed tranches of originally longer securities, but with a residual 3-year life, the weight of this segment reached 8.5% (see Table III.6.a), thus increasing by over 2% compared to the previous year. The 5-year BTPs, on the other hand, whose net issues were negative by € 7,386 million due to € 43,790 million redemptions, maintained a share only slightly higher than in 2016. For both these maturities, in the first months of the year, the supply of securities launched in the auctions with settlement in October 2016 was over and two new lines were opened. More in detail, in mid-March 2017 auction, the issuance cycle of BTP due on October 15, 2019 was closed, reaching a final amount slightly under € 15.7 billion, while the 5-year BTP due on November 1, 2021 was re-proposed until the auction settled at the beginning of February, when it reached an outstanding of around € 14.4 billion. With regard to the 3-year maturity, between April and September the BTP April 18, 2017/June 15, 2020 was offered (with the first short coupon paid on June 15, 2017), and closed with a total amount slightly under € 16.9 billion. In mid- October, the new line due on October 15, 2020 was opened, which at the end of the year had an outstanding of about € 7.2 billion. Fluctuations of market yields in 2017 were reflected in annual coupons: while the security launched in 2016 bore a coupon of 0.05%, the BTP June 15, 2020 had a 0.35% coupon and the BTP October 15, 2020 a 0.20% one. Bid-to-cover ratios at auction fluctuated between a minimum of 1.37, recorded in April at the launch of the new security with a fairly substantial amount (€ 4,500 million) and just before the first round of the French elections, and a maximum of 1.86 at the auction in mid-September. Annual average was 1.74. Also in the 5-year maturity, one security fully completed its issuance cycle during the year: this was the BTP March 1, 2017/April 1, 2022, with first short coupon paid on April 1, 2017, which was launched at end-February auction (settled on March 1) and reopened until the auction settled at the beginning of July, reaching an outstanding of € 16,65 billion. The other new 5-year BTP was opened at end-July (and settled on August 1) maturing on August 1, 2022 and at year-end reached a volume slightly under € 14,1 billion. Bid-to-cover ratio at auction of these 5-year BTPs was generally lower than the 3-year maturity, with an annual average of 1.44. A 1.25 minimum was touched at the end-February auction (settled at the beginning of March), when € 4 billion of the new bond were offered, and a 1.65 maximum was recorded in the end-October auction (settled on November 1).
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Also in this case, coupon rates underwent considerable fluctuations: the BTP April 1, 2022 recorded a significant increase in the coupon, which was set at 1.20% against 0.35% of the previous line, while the BTP August 2022 incorporated a downward correction of market rates, with a coupon of 0.90%. In the 7-year segment, total issued amount in absolute value was slightly lower than in 2016, both in gross and net terms (as there have been no maturities for this segment yet). In percentage, the decrease turned out to be a little more pronounced, although it remained below 1%. Also for this maturity, at the beginning of the year, the cycle of re-openings of the BTP launched in September 2016 was closed, reaching almost € 14.4 billion at the mid-February auction, thus leading to two new issues to be launched during 2017. The first one opened at the mid-March auction with the BTP 1.85% 03/15/2017 - 05/15/2024 (first short coupon paid in mid-May 2017) and closed at mid-July auction with a total outstanding of about € 15.1 billion. The second, launched in mid-September with the BTP 1.45% 09/15/2017 - 11/15/2024 (first short coupon paid in mid-November 2017), closed the year with an outstanding slightly over € 9 billion. In the 10-year segment, despite the redemption of a BTP for € 24 billion in February, net issues were positive of € 11,350 million (again considering on-the- run bonds only). In consideration of the key role played in debt management by the 10-year bond, issues were kept at significant amounts, such as to preserve the weight with respect to debt stock. After the final tranche of the bond due on December 1, 2026 issued at end-December 2016 and settled at the beginning of January 2017, the two new benchmarks launched during the year were the BTP February 1, 2017/June 1, 2027 and the BTP July 4, 2017/August 1, 2027, respectively bearing an annual coupon of 2.20% and 2.05%. For both BTPs, a first short coupon was provided, corresponding to the accrued interest until its maturity. The BTP June 2027 closed the year with an outstanding slightly over € 16.3 billion, while the BTP August 2027 reached almost € 17.7 billion. Bid-to-cover ratios ranged from a minimum of 1.28 of the new benchmark launch auction at end-June (settled on July 4) to a maximum of 1.71 of the auction at end-July, settled on August 1. Annual average was 1.47. In the longer-term segments, Treasury adopted an issuance policy aimed at consolidating the results achieved in 2016, when it had managed to reach about 10% of the total gross issues, thanks to a solid demand, while at the same time issuing securities at largely lower interest rates than the historical ones in the segment. In 2017, even in a still favorable context, the ultra-long demand was somewhat less sharp, due to uncertainties arising from the possible outcome of French elections (therefore mainly in the first part of the year), precisely in the period when investors are usually more inclined to heavily invest, even on very long maturities. Nevertheless, nearly € 34 billion of securities with a 15-year or longer maturity were placed, equal to about 8.2% of total issues. On these segments, issues are carried out regularly, assessing each time which maturity to offer to the market among the available ones (15, 20, 30 and 50 years) and using, as usual, a syndicate of banks to place first tranches. Moreover, in order to enhance auction participation for bonds with a maturity exceeding 10 years, the Treasury kept the right to raise from 15% to 20% the share reserved to Specialists in the non-competitive reopening on the day after the
MINISTRY OF ECONOMY AND FINANCE 60 III. PUBLIC DEBT MANAGEMENT IN 2017
auction. Apart from the auctions of the last months of the year, when a large part of the annual issuance program had been reached, this option was widely used.
In the 15-year segment, the Treasury launched in January the BTP 09/01/2016 - 09/01/2033, 2.45% coupon, placed through a syndicate of five lead managers - Banca IMI SpA, Barclays Bank PLC, Crédit Agricole Corp. Inv. Bank, ING Bank NV and Royal Bank of Scotland PLC - as well as the remaining government bond Specialists as co-lead managers. On January 25, € 6,000 million were settled, with a placement price of 99.131, corresponding to a 2.530% annual gross yield.
Investors participating in the transaction were 210 for a total demand of about € 21,4 billion. In addition to the usual significant portion awarded to banks (40.8%), significant shares were assigned to investors with opposite features: on the one hand, central banks and government institutions (normally acting in a buy- and-hold way) and, on the other, hedge funds, which instead make more frequent changes in their portfolios. Both these categories were awarded a share slightly over 17%. Demand from insurance companies and pension funds was somewhat lower than usual, around 6% overall.
CHART III.5: BTP September 1, 2033 - DISTRIBUTION BY TYPE OF INVESTOR Official institutions Insurances 17.17% Hedge Fund 17.33% 3.40% Pension funds 2.62% Others 1.09%
Investment funds Banks 40.81% 17.59%
Geographical distribution was very diversified, with a considerable share assigned to domestic investors (around 36%). Significant, as usual, also the share of investors resident in the United Kingdom (about 24.8%), followed by the North American one, while the rest of the issue was largely placed in continental Europe, in which Germany/Austria remarkably emerged with 10.3%. The portion of other regions was only residual (0.7%), although interesting as including other European countries, the Middle East, Asia and South America.
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CHART III.6: BTP September 1, 2033 - DISTRIBUTION BY GEOGRAPHICAL AREA
Nordic Countries Spain 3.55% Switzerland 2.53% Benelux 1.81% France 4.22% 4.07% Rest of Europe Germany/Austria10. 0.35% 32% Others 0.27%
USA/Canada
Italy 36.08%
United Kingdom 24.76%
The security was then re-opened three times during the year, at mid-month auctions in March, July and November, reaching an outstanding of over € 10.4 billion at year-end. In addition, in the same segment of the curve an off-the-run issue due March 1, 2030 was finalized, with a € 1,200 million tranche. Bid-to-cover ratios of the new 15-year BTP ranged between 1.60 in March and 1.40 in July, averaging 1.49. In order to meet demand for the 20-year maturity, three mid-month auctions for BTP September 1, 2036 were held in January, April and September, bringing total outstanding to € 14.9 billion at the end of the year. Average bid-to-cover of these auctions was 1.51, ranging from the April low (1.45) and the September high (1.63). Taking advantage of specific demand, the BTP due on August 2039 (with a residual life of approximately 22 years) was offered in February, while a tranche of the BTP due on February 2037 was offered in July; both these BTPs were proposed in the mid-month auction and originally were 30-year bonds. On the 30-year segment, after two auctions conducted in February and May that raised total BTP March 1, 2047 outstanding to over € 15.7 billion, in June favorable conditions for the launch of a new benchmark were observed. Thus, on June 7, 2017, the BTP March 1, 2017 - March 1, 2048 was placed through a syndicate including BNP Paribas, Citigroup Global Markets Ltd., Goldman Sachs Int. Bank, HSBC France and UniCredit S.p.A. as lead managers and other Specialists in government securities as co-lead managers. Annual coupon was 3.45%, paid as usual in two semi-annual instalments. The transaction, settled on June 14, was marked by an excellent market response, as orders totaled over € 23.7 billion. Final issued amount was € 6,500 million and issue price was set at 98.956, corresponding to an annual gross yield at issuance of 3.536%. Approximately 200 investors participated in the transaction and almost half of the placement was underwritten by investment funds (44.9%), as banks subscribed about one third (32.7%). Taking in account its long maturity, the share of central banks and government institutions should be considered as significant (around 5.0% of the issued amount), while the role of pension funds and insurance companies was, all in all, modest. Hedge funds (13.6%) also had a significant
MINISTRY OF ECONOMY AND FINANCE 62 III. PUBLIC DEBT MANAGEMENT IN 2017
share, even if reduced compared to what was recorded for the issue of the new 15-year BTP at the beginning of the year, a sign of greater market confidence after the reassuring outcome of the French elections.
CHART III.7: BTP MARCH 1, 2048 - DISTRIBUTION BY TYPE OF INVESTOR
Investment funds 44.90% Banks 32.7%
Insurances/ Pension funds 3.60% Official Institutions Non-financial Hedge Fund 13.60% 5.00% corporations 0.20%
Geographical distribution of the 30-year BTP saw prevailing foreign investors, which subscribed just under two thirds of the placement, while domestic investors were approximately 36.2%. Among foreign investors, UK and Ireland residents played – as usual - a significant role (31.8%). In continental Europe the most substantial share (10.1%) was allocated in Germany/Austria, coupled with a more fragmented and diversified participation of other countries (see Chart III.8). Outside Europe, the portion to North American investors was a little lower than usual (about 6.1% of the issue) while the share allocated to Asian investors was negligible (0.2%).
CHART III.8: BTP March 1, 2048 - DISTRIBUTION BY GEOGRAPHICAL AREA
France 4.20% Switzerland 2.90% Rest of Europe 3.00% Asia/Australia 0.20% Nordic Countries 5.50% Italy 36.20%
USA 6.10%
Germany/ Austria; 10.1%
United Kingdom/ Ireland 31.80%
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The new 30-year bond was then re-proposed in the mid-October auction and recorded an outstanding of over € 8.2 billion at the end of the year. With regard to the new 50-year maturity, the BTP March 1, 2067, launched in October 2016 with exceptionally favorable conditions (yield at issuance equal to 2.85%), was significantly affected, in terms of price on the secondary market (even due to high duration) by a more cautious market sentiment, stemming at first from the outcome of the constitutional referendum in Italy and, later, from uncertainties about French elections. Therefore, the security was re-proposed only at the end-March auction, for an amount of € 750 million. Related outstanding was € 5,750 million at year-end. In 2017, a number of circumstances also emerged in which demand for some securities no longer being issued (off-the-run) could not be adequately satisfied on the secondary market, probably also due to purchases made by ECB under the PSPP program. Aiming to avoid excessive price mismatches on the secondary market and to exploit better funding conditions, the Treasury then supplied some of these securities at auction, sometimes even replacing the on-the-run bond, when this, instead, showed less appeal. This was the case in the auction at end-December 2016, settled on January 2, 20176, in which an original 30-year BTP with a residual maturity of 10 years was offered for a fairly low amount (€ 1 billion, with an additional € 5 million placed in the reopening reserved for Specialists) in place of the 10-year on-the-run BTP. At times, on the other hand, the on-the run security was offered together with an off-the-run of similar maturity, appropriately distributing the offer so as to maximize issuance effectiveness. This occurred in case of a BTP tranche, with a residual maturity of approximately 3 years (originally a 5-year), offered in the mid-February auction together with the on-the-run 3-year bond, and at end- February, when the benchmark 10-year BTP was offered together with a tranche of an off-the-run 10-year BTP, with a residual maturity of approximately 9 years. On the longer-term segment, the on-the-run and off-the-run offers were often made by proposing a joint "fork" of minimum and maximum amounts for two bonds. This choice is adopted when the market is perceived as providing adequate demand for the securities to be issued, but also as affected by several uncertainty factors, thus leading the issuer to prefer to be more flexible in the issue distribution. This alternative was actually chosen many times: on the occasion of the mid-February auction, when a bond with a residual maturity of about 22 years (BTP August 1, 2039) was added to the 30-year benchmark in issue; then in the mid-March auction, when the 15-year on-the-run BTP was proposed jointly with a tranche of the BTP September 1, 2046; in mid-May, by jointly offering a new 30- year bond with the BTP September 1, 2044 (residual maturity of about 27 years); finally, in mid-July, as the 15-year on-the-run bond was proposed together with the BTP February 1, 2037 (originally a 30-year bond, but with a residual maturity of about 20 years).
6 All auctions at end-December are part of the issuance program for the following year, as they are settled on the first working day of January.
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In mid-April, as already mentioned, the BTP March 1, 2030 (residual maturity of about 13 years) was offered in the same auction together with the 20-year on- the-run bond, but without a joint indication of the allocable amounts, as demand for both securities appeared to be well defined. Overall, during 2017, off-the-run nominal BTPs were issued for a total amount of € 10,680 million. Weighted average yields at issuance of nominal BTPs amounted to 0.23% for the 3-year bond, 0.88% for the 5-year bond, 1.52% for the 7-year maturity, 2.14% for the 10-year maturity, 2.59% for the 15-year BTP, 2.73% for the 20-year BTP, 3.46% for the 30-year BTP and, finally, 3.44% for the 50-year bond. More or less pronounced increases were recorded during the February and March auctions. Main reasons lie both in widespread tensions on the euro area periphery government bonds, given the uncertainty of both French elections and the internal political framework. At the end of the year, however, a rather evident downward trend was recorded on all maturities, as the 3-year bond yield even fell into negative territory. Overall weighted 2017 average yield of nominal BTPs, also taking into account the off-the-run rates at issuance, was equal to 1.55%, against 1.14% recorded in 2016.
CHART III.9: YIELDS AT 2017 AUCTIONS FOR BTPs MATURING BETWEEN 3 AND 10 YEARS (percentages)
3.00 3 year BTP 5 year BTP 7 year BTP 10 year BTP 2.37 2.50 2.28 2.25 2.19 2.29 2.16 2.16 2.09 2.15 1.86 2.00 1.77 1.90 1.69 1.73 1.59 1.57 1.52 1.53 1.65 1.50 1.15 1.21 1.04 1.04 1.35 0.92 1.11 0.88 0.88 0.84 0.83 1.00 0.81 0.58 0.54 0.47 0.37 0.37 0.25 0.50 0.15 0.23 0.15 0.06 0.05 -0.02 0.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -0.50
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CHART III.10: YIELDS AT 2017 AUCTIONS FOR LONG TERM BTPs (percentages)
4.00 15 year 20 year 30 year 50 year
3.50 50 year; 3.44 3.54 3.43 3.32 3.33 3.00 2.87 2.84 2.74 2.77 2.50 2.53 2.38 2.00
1.50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Over the twelve months, total BTPs outstanding amount increased by € 68,135 million. These bonds represented 71.80% of government securities stock at the end of 2017, compared to 69.65% recorded in December 2016.
Characteristics of demand at auction for nominal BTPs: analysis by types of investors and geographical areas
FOCUS Data provided by Specialists in Government Bonds in the reports drawn up according to the harmonized scheme adopted in the Sub-Committee on European Sovereign Debt Markets (ESDM) show the flows observed from the moment of the auction announcement until the day following the auction itself, in which the additional tranche reserved for Specialists is placed. These data are particularly significant for nominal BTPs and offer a good proxy of the final auction demand from investors. Figure 2 shows that the main change in demand’s composition concerned the considerable increase in the presence of hedge funds compared to the two previous years. This was coupled with a rather marked average reduction in banks’ share, while the decrease of investment funds’ share was far less pronounced. Central banks7 and other public institutions, as well as companies and individual investors, significantly lowered. It is worth noting that the increase observed in the hedge fund share was not just limited to Italian securities, as occurring for the majority of European countries.
7 It should be noted that central banks listed here are not those of the European Union, per se not included in these flows, as the Treaties prohibit central banks to directly purchase at auction. Therefore, purchases made under PSPP are not included. Even in the case of purchases on the secondary market (which could be included in these reports if performed right after auctions), Specialists are not authorized by ECB to make disclosures of such flows.
MINISTRY OF ECONOMY AND FINANCE 66
III. PUBLIC DEBT MANAGEMENT IN 2017
FIGURE 2: COMPOSITION BY TYPE OF COUNTERPARTY OF ORDERS PLACED IN THE NOMINAL BTPs AUCTIONS BY GOVERNMENT BOND SPECIALISTS - 2016-2017
100%
80%
60%
40%
20%
0%
Jul-16 Jul-17
Apr-16 Apr-17
Jan-16 Jan-17
Oct-16 Oct-17
Jun-16 Jun-17
Sep-17 Sep-16
Mar-16 Mar-17
Feb-16 Feb-17
Aug-16 Aug-17
Dec-16 Dec-17
Nov-16 Nov-17
May-16 May-17 Corporate&Retail Pension Funds Insurance companies Central Banks and other official institutions Hedge Funds Banks
With regard to investors’ geographical origin, a visible decrease in the domestic component was recorded compared to 2016, while European investors sharply increased especially since March onwards. American investors also increased while investors from the rest of the world (mainly Asian) reduced. The combination of the two sets of statistics suggests that Italian banks decided to operate a not negligible reduction in their BTPs portfolios.
FIGURE 3: COMPOSITION BY GEOGRAPHIC AREA OF ORDERS PLACED IN THE NOMINAL BTPs AUCTIONS BY GOVERNMENT BOND SPECIALISTS - 2016-2017
100% 90% 80% 70% 60% 50% 40% 30% 20% 10%
0%
Jul-16 Jul-17
Apr-16 Apr-17
Jan-16 Jan-17
Oct-16 Oct-17
Jun-16 Jun-17
Sep-16 Sep-17
Mar-16 Mar-17
Feb-16 Feb-17
Aug-16 Aug-17
Dec-16 Dec-17
Nov-17 Nov-16
May-16 May-17
Italy Europe America Others
MINISTRY OF ECONOMY AND FINANCE 67 2017 PUBLIC DEBT REPORT
Inflation-Indexed Securities: BTP€i and BTP Italia
BTP€i In the inflation-indexed space, both the BTP€i, a bond indexed to European inflation as measured by HICP index (net of tobacco products), and the BTP Italia, a linker indexed to Italian inflation as measured by FOI index (net of tobacco products), were proposed. Guidelines for 2017 expected a return to the inflation space for issued amounts slightly exceeding maturities. This was mostly because demand was anticipated to grow in this sector, led by a renewed consensus of investors and analysts in foreseeing an increasing inflation, underpinned by economic recovery and monetary policy interventions, both conventional and not. However, actually recorded inflation was subdued during the year, also affecting inflation expectations8, thus curbing demand for inflation linkers. Therefore, increasing issues on this sector were unable to compensate for a 10-year bond become due, resulting in net negative issues of € 2.7 billion. In detail, the most important reduction occurred in the 5-year segment, as amounts offered at auction were around € 2 billion lower than in 2016. In this sense, even though in 2017 break-even-inflation level stood at around 70 basis points on the 5-year point, demand was more lively on the 10-year maturity, on which, as outlined below, the Treasury managed to place a new benchmark through a syndicated issuance. In the longer 15- and 30-year segments, instead, offered amounts were in line or only slightly lower than those of 2016, despite real rates were about 20/30 basis points higher and break-even-inflation recovered, progressively increasing by 70 basis points in the 15-year and by 40 basis points over the 30-year segment. In practice, as reflecting a fluctuating demand, real yields at issuance recorded no clear trend in 2017 (see Chart III.11).
CHART III.11: REAL YIELDS AT 2017 ISSUANCES, BTP€is (percentages)
BTP €i 5 year BTP €i 10 year 2.00 BTP €i 30 year; 1.78 1.50 1.36 1.22 1.32 1.32 1.17 1.21 1.00 1.24 0.97 0.83 0.37 0.50 0.23 0.14 0.03 0.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-0.50
8 In order to estimate inflation expectations, investors use the traded 5y5y Forward figure as a proxy.
MINISTRY OF ECONOMY AND FINANCE 68 III. PUBLIC DEBT MANAGEMENT IN 2017
In any case, the Treasury succeeded in increasing BTP€i issues as compared to the previous year, as gross issuances totaled € 13,550 million in nominal terms, against € 12,422 million placed in 2016, while a 10-year bond was redeemed for a revalued amount of € 16,0199 million. In detail, as regards on-the-run securities, € 2,895 million were placed in the 5-year segment, € 6,859 million in the 10-year segment, € 2,326 million in the 15-year maturity and € 472 million in the 30-year one. In addition, the Treasury re-opened twice an off-the-run bond (the BTP€i 03/15/2011 - 09/15/2026), with a residual maturity of 9 years, for a total € 998 million. Bid-to-cover ratios at auction were far more sensitive to the auction size compared to nominal bonds and showed a clear negative correlation with the amounts at auction, thus confirming that this space relies on a narrower investor base. Bid-to-cover ratio, indeed, averaged 1.96, but showed rather significant fluctuations, ranging from a 1.35 low to a 2.72 high. Although somewhat changing, auction demand for these securities was fairly balanced between domestic and foreign component, the latter mainly due to European investors. During the year, banks’ share progressively reduced, offset by a significant increase of investment and hedge funds. Further than auction supply, focused on the case-by-case most requested securities, the most significant transaction was finalized on the 10-year maturity, with the placement in March of the BTP€i 11/15/2016 – 05/15/2028, real coupon of 1.3%, through a syndicate consisting of five lead managers - Deutsche Bank AG, JP Morgan Securities PLC., Monte dei Paschi di Siena Capital Services Banca per le Imprese S.p.A., Société Générale Inv. Banking and UBS Ltd - as the rest of Specialists in government securities acted as co-lead managers. The new bond was settled on March 14 for an amount of € 3,000 million, against a total demand of about € 6,4 billion expressed by 95 investors. Gross annual yield at issuance was 1.316%, for a price of 99.878. Of the total issued amount, approximately 45.2% was allocated to investment funds, while banks were awarded around 22.8%. A share of more than 13% was placed to investors with a long-term investment horizon (pension funds and insurance companies for 4.5% and official institutions for 8.7%), while the share subscribed by hedge funds, as in the nominal BTP sector, was 18.8%, higher than the past. Moreover, an increasing role of these investors was recorded in all syndicated issues carried out by Eurozone sovereign issuers (France, Belgium and Spain) in 1H2017.
9 This amount is the sum of € 88,5 million early redeemed in the March debt exchange transaction and the remaining roughly € 15,930 which were redeemed at mid-September (amounts revalued for accrued inflation).
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CHART III.12: BTP€i May 15, 2028 - DISTRIBUTION BY TYPE OF INVESTOR Insurances/ Pension funds Investment funds Official Institutions 45.15% 8.73% 4.50%
Hedge Fund 18.80%
Banks 22.82%
Geographical distribution showed a high participation (39.6%) of UK and Irish investors. Domestic investors ranked second in terms of share, reaching 35.4%. Among other foreign investors, shares allocated to France (6.7%), Benelux (5.9%) and Nordic countries (2.7%) were significant, while distribution in other European countries was very fragmented. Outside Europe, US investors underwrote about 6.7% of the issue.
CHART III.13: BTP€i May 15, 2028 - DISTRIBUTION BY GEOGRAPHICAL AREA Nordic Countries Iberia 1.17% Germany/Austria/S 2.67% witzerland 1.82%
Benelux 5.93% France 6.73% Italy 35.38%
USA 6.73%
United Kingdom/Ireland 39.57%
BTP Italia As regards BTP Italia, 2017 was characterized by record size of maturities. Indeed, the two 2013 issues were maturing, both having been characterized by a huge demand at issuance (100% met), for a total amount exceeding € 39 billion. The bond due in November was the most challenging, both for size (about € 22.3
MINISTRY OF ECONOMY AND FINANCE 70 III. PUBLIC DEBT MANAGEMENT IN 2017
billion) and for becoming due in a month and a week when Treasury available cash was far from large. As widely explained in the relevant paragraph, in order to mitigate the impact of this situation, a specific debt exchange transaction was carried out in April. In 2017 two BTP Italia issues took place, in May and November, which were welcomed by the market, while sizes remained below the amount of securities coming due. This was firstly because very low coupons discouraged excessive demand by retail investors (which in any case continued to express wide appreciation for this security), secondly because the Treasury is by now able to conduct such issuance in a way that allow to cap institutional investors demand, in order not to have to deal with potential problems stemming from the size of maturing securities. Precisely to better meet retail investors preference to avoid too long-run investments (retail sector being the target of this security), 2017 issues returned to the 6-year maturity (as in 2014), following two years in which the bond had been placed with an 8-year maturity. Thus, investors who had underwritten the 4- year BTP Italia in 2013 were encouraged to stay in the investment by buying the new security with the same features and only two years longer. Therefore, on May 22, the BTP Italia 05/22/2017 - 05/22/2023 was settled and its definitive real coupon was set at 0.45%, paid in two semi-annual coupons. The issue amounted to € 8,590 million, stemming from the total size of the purchase contracts validly concluded at par on the MOT (the Borsa Italiana's screen-based market for obligations and government bonds) through Banca IMI S.p.A. and Unicredit S.p.A. Placement period was, as usual, divided into two phases, of which the first - dedicated to individual investors and similar - took place between May 15 and 17. In this first phase, € 3,190 million were placed, stemming from 55,945 single contracts, of which 49% recorded a unit amount below € 20,000 and 82% were up to € 50,000. The share of individual investors (58%) was higher than that of private banking (42%), while, as regards geographic distribution, around 92% was underwritten by domestic investors against 8% abroad. The second phase of placement, dedicated to institutional investors, took place on May 18 and lasted two hours. Received and executed buy bids were 427, for a total amount of € 5,400 million, while total demand reached € 7,041 million. 66% of the amount was placed to banks, 27% to investment funds, 3% to central banks and supranational organizations while the remaining share was underwritten by insurance companies and other institutions. Italian investors played a substantial role in this second phase also, by underwriting about 74% of the issue. Among foreign investors, largest shares were subscribed from United Kingdom and Ireland (15%), then Switzerland (5%), while the remaining 6% was placed among other European countries investors. The second and last issue of BTP Italia in the year was settled on November 20. The issued amount of the bond 11/20/2017 - 11/20/2023 was € 7,107 million, stemming from the amount of the purchase contracts on the MOT, placed through Monte dei Paschi di Siena Capital Services Banca per le Imprese S.p.A. and BNP Paribas. Real coupon rate was set at 0.25%. During the first phase of placement, from November 13 to 15, € 3,757 million were underwritten, stemming from 62,563 single contracts, of which 47% were
MINISTRY OF ECONOMY AND FINANCE 71 2017 PUBLIC DEBT REPORT
below a unit amount of € 20,000, while contracts up to € 50,000 accounted for approximately 79% of the total amount. As regards investors’ characteristics, individuals and private banking accounted for 54% and 46% respectively. Domestic investors accounted for about 98%, while 2% was placed abroad. In the second phase of placement, which took place on November 16 for about 2 hours, received and executed buy bids were 557, for an overall € 3,350 million, while total demand had reached € 10,777 million. 73% of the amount was placed to banks, 17% to investment funds, a 4% share was allocated to both insurance companies and hedge funds, 1% to central banks and supranational institutions and the remaining to other institutions. Italian investors subscribed approximately 84% of this phase’s total amount, but UK and Ireland investors share (around 13%) was also significant. A further 3% of the issue was placed among investors from other countries, mainly European. During 2017, the combination of maturities and issues resulted in a BTPs Italia stock decrease equal to € -23,632 million. At year-end, this security represented 3.48% of total government bonds stock, compared to 4.82% recorded at the end of 2016. The inflation-indexed sector, consisting of BTP€is and BTPs Italia, ended the year with an inflation-adjusted overall stock of € 213,228 million, down by 10.16% compared to € 237,350 million in 2016. This segment represented 11.18% of government bonds stock at the end of 2017, compared to 12.71% of the previous year.
Floating rate securities: CCTeu In the floaters space, nearly € 30 billion were expiring (including the last CCT indexed to 6-month BOT rate, matured in March), a considerably higher figure than in the previous year (close to € 13 billion). Taking into account good performances recorded in 2016 by these securities on the secondary market, the Treasury increased 2017 CCTeu gross issues, which amounted to € 31,023 million as compared to € 28,854 million in 2016. After having closed, at end-March auction, the security due on February 15, 2024 (with reached a total outstanding slightly below € 15 billion), two new lines were opened in 2017. At first, the CCTeu April 15, 2017 – October 15, 2024, which ended its auction cycle at a size of € 13,750 million. In a second step, the CCTeu October 15, 2017 - April 15, 2025 was issued in the auctions settled at the beginning of November and December, which reached an outstanding of almost € 6.6 billion at the year-end. Market rates changes significantly affected the securities’ spread on Euribor: while the bond due on February 2024 and launched at the end of October 2016 had a 0.75% spread, the CCTeu October 2024, opened at the end of April - when the French presidential election cycle had not ended yet - showed a 1.10% spread, while the CCTeu April 2025 had a 0.95%. CCTeus were always offered in the 7-year maturity, meeting a lively and sustained demand. Since off-the-run bonds also attracted a great interest, this led to offer at end-February auction the off-the run CCTeu December 15, 2022 jointly with the on-the run security. Bid-to-cover ratio fluctuated between the end-April 1.29 and 2.16 recorded on the end-February off-the-run, averaging 1.57.
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As shown by Specialists' reports, auction demand composition of CCTeus was characterized by a major role of Italian investors, which exceeded, albeit not by much, foreign ones (almost exclusively European). During the year, commercial banks gradually reduced their share, offset by a significant increase in investment funds and by a lower - although substantial - share of hedge funds (which in 2016 had almost been null). Central banks and other official institutions also accounted for a not negligible share, limited to 1H2017. At year-end, however, also due to bond exchange and buyback transactions, floaters total outstanding amount showed a downward adjustment of almost € 1.8 billion. In percentages, it decreased to 6.97% of total government securities stock from 7.21% in 2016. Weighted average yield at issuance stood at 0.73%, upward compared to 0.54% recorded in 2016.
CHART III.14: YIELDS AT 2017 ISSUANCES, CCTeus (percentages)
1.20 0.93 1.00 0.92 0.83 0.73 0.79 0.70 0.77 0.81 0.80 0.75 0.58 0.60 0.60 0.46
0.40 Off the run (residual life 5 0.20 year); 0,53
0.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Extraordinary transactions In 2017, Treasury was particularly active on the market with extraordinary transactions (both debt exchanges and buybacks) aiming at reducing total debt.
Debt exchanges As for debt exchanges, 6 transactions were carried out, of which 5, as usual, through the electronic trading system, which allows to directly trade on the wholesale regulated secondary market platform (MTS). The main objective was to smooth maturity profile in a 3-year time-frame, also including securities due on 2017 itself, as this year was heavily-laden with redemptions, mainly in the second half. Treasury also aimed to adjust secondary market price mismatches, which could have negatively affected auctions, by supplying in-demand securities. Prices of the offered securities were significantly higher than those of the repurchased ones, thus allowing as an additional advantage a net reduction in the
MINISTRY OF ECONOMY AND FINANCE 73 2017 PUBLIC DEBT REPORT
nominal debt of € -2,867 million10 at year-end. It is worth pointing out that, under ordinary conditions, demand for securities with such high prices is quite low, since most operators prefer instruments bearing coupons in line with current market levels, thus traded close to par. However, PSPP generated a scarcity effect on the market, making these off-the-run securities unusually attractive. Whenever possible, efforts were made to issue securities with a not too high outstanding, while strong demand was steady, as well as tensions on the repo market, due to the limited available amount of these securities on the market. Repurchased securities were selected on the basis of high outstanding, prices near or below par and maturity dates falling in months with higher scheduled redemptions. Details of each debt exchange transaction are shown in the following tables.
TABLE III.3.a: DEBT EXCHANGE ELECTRONIC TRANSACTION OF 3/17/2017 (€ million) Auction date 03/17/2017 Settlement date 03/21/2017 Security on issue BTP 08/01/2003 – 08/01/2034 Assigned amount 1,368 Award weighted average price 125.369 Accrued interests (days) 48 Repurchased bond Issue date – Maturity Coupon Repurchase price Repurchased nominal BTP 02/01/02 – 08/01/17 5.25% 102.055 159,685 BTP€i 03/15/06 – 09/15/17 2.10%(1) 102.000 75,765 BTP 11/01/12 – 11/01/17 3.50 102.311 275,698 BTP 10/15/14 – 01/15/18 0.75% 100.795 429,081 BTP 08/01/07 – 02/01/18 4.50% 104.085 717,927 Repurchased total 1,658,156 (1) Current semi-annual coupon
TABLE III.3.b: DEBT EXCHANGE ELECTRONIC TRANSACTION OF 7/7/2017 (€ million) Auction date 07/07/2017 Settlement date 07/11/2017 Security on issue BTP 02/01/2002 – 02/01/2033 Assigned amount 1,807 Award weighted average price 136.432 Accrued interests (days) 160 Repurchased bond Issue date – Maturity Coupon Repurchase price Repurchased nominal CCTeu 04/15/11 -04/15/18 0.758%(1) 100.825 453,260 BTP 02/01/08 – 08/01/18 4.50% 105.134 583,978 BTP 09/01/13 – 12/01/18 3.50% 105.202 518,682 BTP 02/01/03 – 02/01/19 4.25% 106.850 536,301 BTP 03/01/09 – 09/01/19 4.25% 109.000 252,840 Repurchased total 2,345,061 (1) Current semi-annual coupon
10 In fact, the sum of single transactions would have led to a higher amount (€ -2,962 million), but given that in the March debt exchange were included securities due in 2017 for about € 467 million, the actual effect of debt reduction at year-end is limited to approximately € 2,867 million.
MINISTRY OF ECONOMY AND FINANCE 74 III. PUBLIC DEBT MANAGEMENT IN 2017
TABLE III.3.c: DEBT EXCHANGE ELECTRONIC TRANSACTION OF 10/04/2017 (€ million) Auction date 10/04/2017 Settlement date 10/06/2017 Security on issue BTP 11/01/1996 – 11/01/2026 Assigned amount 2,000 Award weighted average price 143.451 Accrued interests (days) 158 Repurchased bond Issue date – Maturity Coupon Repurchase price Repurchased nominal BTP 04/02/13 – 06/01/18 3.50% 102.531 537,931 CCTeu 05/01/13 – 11/01/18 1.552%(1) 102.009 831,867 BTP 09/01/08 – 03/01/19 4.50% 106.683 287,738 BTP 07/01/14 – 08/01/19 1.50% 103.025 515,216 BTP 03/01/09 – 09/01/19 4.25% 108.390 582,270 Repurchased total 2,345,061 (1) Current semi-annual coupon
TABLE III.3.d: DEBT EXCHANGE ELECTRONIC TRANSACTION 11/17/2017 (€ million) Auction date 11/17/2017 Settlement date 11/21/2017 Security on issue BTP 02/01/2002 – 02/01/2033 Assigned amount 2,000 Award weighted average price 142.711 Accrued interests (days) 112 Repurchased bond Issue date – Maturity Coupon Repurchase price Repurchased nominal BTP 02/01/08 - 08/01/18 4.50% 103.440 686,447 BTP 09/01/13 – 12/01/18 3.50% 104.018 576,222 BTP 02/01/03 – 02/01/19 4.25% 105.524 439,518 BTP 02/03/14 – 05/01/19 2.50% 104.070 750,770 BTP€i 03/15/08 – 09/15/19 2.35%(1) 106.945 248,905 Repurchased total 2,701,862 (1) Real coupon
TABLE III.3.e: DEBT EXCHANGE ELECTRONIC TRANSACTION 12/15/2017 (€ million) Auction date 12/15/2017 Settlement date 12/19/2017 Security on issue BTP 08/01/2007 – 08/01/2039 Assigned amount 2,000 Award weighted average price 136.765 Accrued interests (days) 140 Repurchased bond Issue date – Maturity Coupon Repurchase price Repurchased nominal CTZ 03/30/16 – 03/28/18 - 100.137 550,420 CCTeu 04/15/11 - 04/15/18 0.726%(1) 100.405 360,932 BTP 02/01/08 – 08/01/18 4.50% 103.096 159,196 BTP 02/03/14 – 05/01/19 2.50% 103.913 344,820 BTP 07/01/14 – 08/01/19 1.50% 103.010 1.261,321 Repurchased total 2,676,790 (1) Current semi-annual coupon
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For all the above transactions, differences in residual maturity between the issued securities (between 9 and 22 years) and the repurchased ones (up to 2 years) allowed to lengthen debt average life. The sixth debt exchange transactions presented some peculiar features compared to the previous ones. In this case, debt exchange was conducted through a syndicate formed by two government bonds Specialists, Banca IMI S.p.A. and UniCredit S.p.A., who were given the mandate to repurchase the BTP Italia 11/12/2013 - 11/12/2017, 2.15% annual real coupon. The security was partially withdrawn from the market for € 4,17 billion, compared to a total offer of around € 7,1 billion. Of the above amount, about 63% was given back by banks, 34% by fund managers, while the remaining 3% by supranational institutions and insurances. Domestic investors accounted for 87% of the accepted bids, while among foreign investors the most significant share, equal to about 11%, was repurchased from UK investors. Lastly, a remaining share of around 2% was from France and the Middle East. At the same time, the above banks were given a mandate to place both nominal BTPs, maturing in February 2020, March 2025, November 2027 and March 2032, and the CCTeu July 2023, for total € 4,2 billion, almost equally divided among the five issued securities. Approximately 87% of the latter were subscribed by banks, 10% by fund managers and the remaining 3% placed to supranational institutions. Domestic investors played a major role, being awarded about 81% of total issued amount. The largest contribution among foreign investors was represented by UK residents (around 14%), while remaining shares were allocated to Luxembourg (3.5%) and US (1.5%) investors. The transaction was deemed appropriate not only because the BTP Italia amount scheduled to be redeemed was the largest ever for this sector, but also due to the fact that its maturity date was scheduled in November, when the liquidity buffer collected throughout summer tax revenues records a physiological decreases, and precisely on the 12th of the month, a day in which neither significant income nor auction settlement were scheduled. Furthermore, on November 1, a nominal BTP had already been redeemed for almost € 16 billion, also making use of available resources at the Sinking Fund.
TABLE III.4: DEBT EXCHANGE TRANSACTION OF 5/25/2017 (€ million) Auction date 05/25/2017 Settlement date 06/01/2017 Repurchased security BTP Italia 11/12/2013 – 11/12/2017 Repurchased nominal 4,170 Repurchase price 101.74 Issued securities Issue date – Maturity Coupon Issue price Assigned amount BTP 01/02/04 - 01/02/20 4.50% 111.474 750,000 BTP 01/03/09 - 01/03/25 5.00% 123.979 850,000 BTP 01/11/97 - 01/11/27 6.50% 140.502 750,000 BTP 01/03/15 - 01/03/32 1.65% 90.387 950,000 CCTeu 15/01/16 - 15/07/23 0.234%(1) 99.920 900,000 Issued total 4,200,000 (1) Current semi-annual coupon
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Debt reduction transactions
Use of the Sinking Fund for government securities redemption Resources available in the Sinking Fund (€ 599 million) were used to partial fund the redemption of BTP 11/01/2012 – 11/01/2017. The choice to redeem at maturity allowed to maximize (compared to a buyback) the effect of debt stock reduction, since securities prices on the secondary market were almost all above par, in many cases even significantly. It was therefore decided to avoid an additional cash outlay – stemming from the difference between the market price and the redemption nominal amount - which would have been inconsistent with the Sinking Fund statutory purposes. Resources available at the Sinking Fund mostly stemmed from the principal amount of installments paid by regions and local authorities to repay advances granted for various reasons11 by Central government. Further minor sources of funding were the fees paid by banks for the government guarantees granted on bank liabilities to face crisis situations, as well as private donations.
Buybacks Once redeemed the BTP Italia due on November 12 (which, although reduced by the special debt exchange in May, still stood at more than € 18 billion), and collected the net proceeds from the new BTP Italia issue settled on November 20, wide available cash allowed to carry out several buybacks. These latter were finalized both through public auctions held at the Bank of Italy and bilateral transactions, mandated by the Treasury to intermediaries selected among government bonds Specialists. Buybacks outnumbered past figures (at least with regard to the last few years), as aiming to reach Cash Account year-end target balance, which had been set at around € 30 billion in April 2017 EDF figures. Indeed, since the amount of maturities scheduled in 2018 was substantially lower compared to 2017, and also evenly distributed in the various months, any excessive liquidity buffer would have been counterproductive, as entailing unnecessary costs due to the negative rates to be applied to deposits under the current ultra-accommodative monetary policy. Four buyback transactions were therefore carried out: two through competitive auctions in the Bank of Italy and two via bilateral negotiations. A buyback through competitive auction (the so-called Reverse auction) allows the Treasury to repurchase from Specialists more than one security at the same time and for high overall amounts. Two working days before transaction, securities to be repurchased are publicly disclosed and the auction mechanism in the Bank of Italy is very similar to that of ordinary selling auctions. Once bids are placed, the Treasury holds the right to exclude those not reflecting current market values.
11 Repayment of commercial debts, debt restructuring in the health sector and similar (D.L. 35/2013, converted with amendments by Law 64/2013; D.L. 102/2013, converted with amendments by Law 124/2013; D.L. 66/2014, converted with amendments by Law 89/2014).
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Being a competitive auction, accepted bids are settled at the price indicated by each trader. Bilateral negotiations, on the other hand, are more streamlined procedures and usually aim to repurchase a single security for a lower amount. The Treasury gives a mandate to a Specialist listing the security to be repurchased, the maximum amount, the spread on market price and the deadline for the transaction, always keeping the right to modify the above should market conditions change. Overall, 43% of the repurchased securities were BTPs, while the remaining 57% concerned CTZs and CCTeus. Criteria used to select securities to be repurchased were the same as those used for bond exchanges: that is, securities scheduled to become due in periods with challenging redemptions deadline, and quoted at a not particularly-high price, usually very close to par, in order to maximize positive effect in reducing debt. Securities involved in the buybacks were mainly scheduled to become due in 2018 and 2019, except for a 2020 bond and a 2021 one.
TABLE III.5: SUMMARY OF 2017 BUYBACK TRANSACTIONS (nominal amounts, € million) Settlement date Security Repurchased Type Type Maturity year amount of transaction 11/24/2017 BTP, CCTeu and CTZ 2018/19/21 5,503 Competitive auction at Bank of Italy 12/05/2017 CTZ 2019 700 Bilateral operation 12/11/2017 CTZ 2019 450 Bilateral operation 12/21/2017 BTP, CCTeu and CTZ 2018/19/20 3,225 Competitive auction at Bank of Italy Repurchased total 9,878
Thanks to the above substantial extraordinary transactions, in 2017 the Treasury managed to reduce outstanding securities stock at year-end, in nominal terms, for a total € 12,735 million - of which € 9,878 million through buybacks and € 2,857 million through debt exchanges – compared to € 2,792 million of previous year.
CHART III.15: AMOUNT REPURCHASED IN EXTRAORDINARY TRANSACTIONS - 2013 TO 2017 (nominal amounts, € million)
30,000
25,000
20,000
15,000
10,000
5,000
0 2013 2014 2015 2016 2017 Electronic debt exchanges Syndicated debt exchanges Buybacks via Cash Account Buybacks via Sinking Fund
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Foreign Bonds No international securities were issued in 2017, while a total € 3,357 million medium/long-term securities were redeemed. In the Global segment, a bond expired in June, for an equivalent amount of € 1,800 million. As regards the Euro medium term notes (EMTN), € 1,210 million in fixed-rate securities become due, while in May the Treasury exercised a call option to early redeem a security issued in Japanese yen, with a scheduled redemption in 2036. Lastly, the remaining € 172 million were related to principal installments of some amortizing EMTNs. Total outstanding foreign securities12, denominated in both euro and other currencies, decreased by € -3,642 million over twelve months, thus representing 2.32% of government securities total stock at year-end, compared to 2.56% recorded at the end of 2016. The lack of issues in the Global sector was essentially due to the incomplete set-up of the regulatory regime on bilateral guarantees for derivatives exposures, whose implementing decrees were eventually issued only in December. Since costs associated to exchange rate hedging would have made any issue in foreign currency (namely dollar) too expensive without a two-way collateral system, it was indeed preferable not to access this funding channel.
On the other hand, the euro-denominated EMTN segment has been working well since long time with an on-demand mechanism by institutional investors. In 2017, this demand did not emerge, probably because, by adding in 2016 the new 20- and 50-year nominal maturities in the domestic market, supply of public securities had largely widened, making the Italian yield curve the most populous among those of European sovereign issuers. At the same time, in the linkers sector, any investment demand was actually recorded that could not be fully met by BTP€is and BTPs Italia.
III.3 DERIVATIVES PORTFOLIO MANAGEMENT
In 2017, derivatives portfolio management focused on structural improvement of the portfolio itself, which was affected by the persistently low rates market environment, that could not be foreseen at the time when the transactions had originally been put in place. Activities performed in 2017 were therefore a matter of restructuring some among existing positions. A first restructuring involved a receiver swaption with maturing date in March 2017. Should this option have been exercised, it would have generated a 30-year IRS with a notional amount of € 2 billion, on which the Treasury would have paid 3.795% annually while receiving 6-month Euribor rate on the floating leg. The swap was subject to an early termination option (ETO), exercisable every 10 years, at a first time as early as 2017.
12 Foreign securities stock includes bonds originally issued by ISPA, which later became direct government liabilities under the 2007 Finance Act.
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Given the extremely low level of the 30-year swap rate at the beginning of 2017, it was fairly certain that the ETO would have been called, resulting in a sizable disbursement for the State, estimated at around € 1.2 billion. In any case, even if the bank had decided not to early terminate the IRS, an accounting debt for the same amount would have been generated by applying the SEC 2010 manual (since the IRS originated from the option exercise, as starting at a negative market value, should have been considered as an off-market swap). Thus, the restructuring transaction consisted of three phases. Firstly, the original counterparty accepted to lower the strike rate of the swaption by 5.5 basis points, from 3.795% to 3.74%, in exchange for the assignment to another counterparty of the restructured option. The new counterparty stepping into the contract was the second phase carried out, closely connected to the previous one, which would not have been finalized should the novation not been expected. Finally, the option at the new strike rate was restructured with the new counterparty by postponing the option maturity by three years (from March 2017 to March 2020), also definitively setting the strike rate at 3.805% while keeping unchanged the 30-year maturity of the underlying swap. From a purely formal point of view, restructuring an option consists of a buyback of the existing option and a sale of the new one. In this case, the premium for the buyback of the old one was higher than that of the new one. Thus, an amortization plan was agreed for the premium differential, divided into four installments of € 75 million to be annually paid by Treasury until 2020. The new swaption will become exercisable in 2020. This postponement allowed to massively reduce the impact on 2017 State budget (€ 75 million as compared to the estimated € 1.2 billion) and to delay by three years any inception of the IRS, which was off-market when the transaction was closed, but in 2020 could be closer to an at-market swap. A second restructuring involved an IRS with a notional amount of € 1.5 billion and expiring date in 2046, under which the Treasury was paying a 4.317% fixed rate while receiving 6-month Euribor. This IRS, whose initial market value had already been classified as debt as for Eurostat accounting purposes (having been originated in 2016 from the exercise of a swaption), was split up into three parts. On the first one, corresponding to a substantial part of the current mark-to-market value at the time of the restructuring, it was decided to gradually pay the value in quarterly € 65 million installments from 2018 until 2021. By this way, redemption of a large part of the accounting debt originated in 2016 was made faster. The thus “lightened” IRS with maturity in 2046 was split into two new swaps, both with a notional amount of € 1.5 billion. In the first one, with immediate inception in 2017 and expiration in 2022, the fixed leg for the Treasury was lowered by about 130 basis points compared to the original IRS (from 4.317% to 3%), thus reducing the impact on cash needs by about € 20 million per year. In the second one, whose inception was delayed of 4.5 years (thus to the expiration date of the first one), a resetting mechanism was introduced for the fixed leg to be paid by Treasury. Only the fixed rate to be applied in the first quarter was determined at the time the restructuring was carried out, at a rate in line with market for the same maturity (1.88%), while following flows were agreed to be re- couponed quarterly. The counterparties also agreed to quarterly pay/receive the
MINISTRY OF ECONOMY AND FINANCE 80 III. PUBLIC DEBT MANAGEMENT IN 2017
market value of their position. If this value is positive, the Treasury will receive it and the rate to be applied in the following quarter will be fixed at a higher level than the previous one; vice versa in case of negative value to the Treasury. In other words, on a quarterly basis, there will be a balance between the new applicable rate and the outflows/inflows due to the mark-to-market on that date. By this way, the IRS is ensured to steadily stay at-market, net of intra-quarter fluctuations. This restructuring also led, as an additional positive effect, to lower the amount of the initial stock of accounting debt, as recalculated according to post- renegotiation framework. In fact, the IRS arising from the exercise of the swaption in 2016 would have recorded an accounting debt of € 1,17 billion at December 31, 2017 (€ 1.19 billion at the moment the option was exercised ), while post restructuring it was reclassified as a € 1.042 billion debt. Thanks to this restructuring, a reduction in debt for approximately € 132 million was therefore recorded, as the difference between the before- and post-restructuring accounting debts. The latter consisted of two items: € 845 million (total amount of quarterly installments) and € 193.2 million (mark-to-market of the first IRS 2017-2022 at 3%). Moreover, in light of this restructuring, the counterparty stated formally to waive an early termination option on an IRS, with a € 2.5 billion notional and maturity in 2034, exercisable in 2018, which would have produced, if exercised, a non-negligible outlay (estimated at around € 1.38 billion). It should be also mentioned that in 1H2017 a counterparty exercised the right to cancel a Yen/Euro cross currency swap, which was hedging a Yen 125 billion issue with scheduled maturity in May 2036, that was early redeemed in May 2017 by the Treasury (see Par. III.2) according to the security features. Lastly, in 1Q2017 four cash-settled swaptions were exercised by a same counterparty. Each one had a € 875 million notional and underlying 15-year IRS (expiring in 2032). The agreement, put in place in 2015 and described in the relevant year Public Debt Report, stipulated that should the swaption be exercised, four 15-year IRSs would have took place without additional costs. The exercise of the four options, if on one hand led the Treasury to pay their market value to the counterparty (about € 972 million), on the other hand also gave rise to four new at-market IRS, with a 15-year maturity and the same notional of the options. Average fixed rate to be paid by Treasury on these four swaps is very low: slightly below 1.184%, corresponding to the mid-swap at the time of exercise.
III. 4 DEBT MANAGEMENT RESULTS COMPARED TO GOALS
Final composition of the year’s gross issues As already mentioned, the only appreciable gap in issue amounts with respect to the programs set at the start of the year was recorded by BOTs, whose issues were actually curbed rather than slightly increased as expected. On the other hand, the slight increase in 2-year and 3-year bonds issues was achieved, coupled with a slight reduction in the longer-term end (see Tables III.6.a and III.6.b).
MINISTRY OF ECONOMY AND FINANCE 81 2017 PUBLIC DEBT REPORT
TABLE III.6.a: COMPOSITION OF 2015-2017 ISSUES IN ABSOLUTE AND PERCENTAGE VALUE NET OF DEBT EXCHANGES * 2015 Issues % 2016 Issues % 2017 Issues % BOT mini 0 0.00% 0 0.00% 0 0.00% BOT 3 month 0 0.00% 0 0.00% 0 0.00% BOT 6 month 80,956 19.74% 76,669 19.19% 75,000 18.13% BOT 12 month 83,174 20.28% 76,025 19.03% 76,601 18.52% Commercial Paper 0 0.00% 0 0.00% 0 0.00% Total short term 164,130 40.03% 152,694 38.23% 151,601 37.95% CTZ 27,388 6.68% 18,991 4.75% 28,660 6.93% CCTeu 27,503 6.71% 28,854 7.22% 31,023 7.50% BTP 3 year 28,924 7.05% 25,215 6.31% 35,148 8.50% BTP 5 year 33,729 8.23% 33,747 8.45% 36,404 8.80% BTP 7 year 31,340 7.64% 31,328 7.84% 29,762 7.19% BTP 10 year 39,049 9.52% 38,977 9.76% 37,902 9.16% BTP 15 year 17,129 4.18% 11,410 2.76% 11,634 2.81% BTP 20 year 1,150 0.28% 10,105 2.53% 7,513 1.82% BTP 30 year 13,241 3.23% 14,436 3.61% 14,041 3.39% BTP 50 year 0 0.00% 5,000 1.25% 750 0.18% BTP€i 5 year 692 0.17% 4,942 1.24% 2,895 0.70% BTP€i 10 year 3,823 0.93% 4,082 1.02% 7,856 1.90% BTP€i 15 year 8,019 1.96% 2,691 0.67% 2,326 0.56% BTP€i 30 year 562 0.14% 707 0.18% 472 0.11% BTP Italia 9,379 2.29% 13,234 3.31% 15,697 3.79% Foreign 4,000 0.98% 3,036 0.76% 0 0.00% Total m/l term 245,927 59.97% 246,756 61.77% 262,084 63.35% TOTAL 410,057 399,449 413,684 * Off-the-run bonds have been allotted in the closest residual life category TABLE III.6.b: COMPOSITION OF 2015-2017 ISSUES IN ABSOLUTE AND PERCENTAGE VALUE GROSS OF DEBT EXCHANGES* 2015 Issues % 2016 Issues % 2017 Issues % BOT mini 0 0.00% 0 0.00% 0 0.00% BOT 3 month 0 0.00% 0 0.00% 0 0.00% BOT 6 month 80,956 19.49% 76,669 18.77% 75,000 17.56% BOT 12 month 83,174 20.03% 76,025 18.61% 76,601 17.94% Commercial Paper 0 0.00% 0 0.00% 0 0.00% Total short term 164,130 39.52% 152,694 37.38% 151,601 35.50% CTZ 27,388 6.59% 18,991 4.65% 28,660 6.71% CCTeu 29,503 7.10% 28,854 7.06% 31,923 7.48% BTP 3 year 28,924 6.96% 25,215 6.17% 35,898 8.41% BTP 5 year 33,729 8.12% 33,747 8.26% 36,404 8.52% BTP 7 year 31,340 7.55% 33,328 8.16% 30,612 7.17% BTP 10 year 40,712 9.80% 42,604 10.43% 40,652 9.52% BTP 15 year 18,703 4.50% 12,910 3.16% 17,759 4.16% BTP 20 year 1,150 0.28% 12,015 2.94% 9,513 2.23% BTP 30 year 13,241 3.19% 14,436 3.53% 14,041 3.29% BTP 50 year 0 0.00% 5,000 1.22% 750 0.18% BTP€i 5 year 692 0.17% 4,942 1.21% 2,895 0.68% BTP€i 10 year 3,823 0.92% 4,082 1.00% 7,856 1.84% BTP€i 15 year 8,019 1.93% 2,691 0.66% 2,326 0.54% BTP€i 30 year 562 0.14% 707 0.17% 472 0.11% BTP Italia 9,379 2.26% 13,234 3.24% 15,697 3.68% Foreign 4,000 0.96% 3,036 0.74% 0 0.00% Total m/l term 251,164 60.48% 255,793 62.62% 275,458 64.50% TOTAL 415,294 408,486 427,059 * Off-the-run bonds have been allotted in the closest residual life category
MINISTRY OF ECONOMY AND FINANCE 82 III. PUBLIC DEBT MANAGEMENT IN 2017
Composition of the securities’ stock at year-end The most evident change in the composition of government bonds stock between 2016 and 2017 affected the BTPs, that increased by over 2%. This was coupled with a further, albeit marginal decline of the weight of BOTs, highlighting that trends in demand allowed to avoid an increase in the short-term end, especially thanks to an increasing interest in the 3-year BTPs. Secondly, the linkers space shrank, mainly the BTP Italia, which fell by more than 1.3%. Actually, this effect was expected, given that a return to investments in this security for the full size maturing in 2017 was not conceivable, nor desirable. Also BTP€is recorded a lowering relative weight, albeit at a much smaller extent, proving that market conditions were affected by directionless inflation trend, leading to uncertainty in expectations and fluctuating demand.
CHART III.16: COMPOSITION OF GOVERNMENT BOND STOCK AT DECEMBER 31, 2016 AND AT DECEMBER 31, 2017
Foreign Debt Foreign Debt Euro Currency BTP Italia 2.43% 0.13% BOT CCT (indexed) 5.74% 0.42% 4.82% CCTeu BTP€i 6.79% (indexed) 7.89% CTZ 2.12%
BTP 69.65% Dec. 31, 2016
Foreign Debt Foreign Debt Euro Currency BTP Italia 2.21% 0.11% (indexed) BOT 5.59% 3.48% CCTeu 6.97% BTP€i (indexed) CTZ 7.70% 2.13%
BTP 71.80% Dec. 31, 2017
MINISTRY OF ECONOMY AND FINANCE 83 2017 PUBLIC DEBT REPORT
Exposure to refinancing and interest rate risks Reducing exposure of the debt portfolio to refinancing and interest rate risks has been one of the main objectives of the Treasury, pursued for many years by gradually recomposing the portfolio structure towards the fixed rate, while also lengthening average life. The following Chart III.17 shows how this strategy has been a constant goal for decades, consistently with changes in market conditions and the size of the portfolio itself.
CHART III.17: EVOLUTION IN STRUCTURE AND AVERAGE LIFE OF DOMESTIC DEBT, 1993 TO 2017 80% 8 70% 7 60% 6 50% 5 40% 4 30% 3 20% 2 10% 1
0% 0
1997 1993 1994 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Floating rate Fixed rate Linkers Average life (years, RHS)
In the Public Debt Management Guidelines for 2017, given expectations of a less favorable market coupled with funding needs significantly higher than the previous year, the objective of maintaining the debt average life at the same level of year- end 2016 had been considered as quite ambitious. Conversely, the overall positive actual market performance allowed to go beyond expectations and the Treasury was able to avoid an increase in BOTs supply by meeting the buoyant demand on the 2-3 year segment, thus curbing refinancing risk. As it can also be observed in the following Chart III.18, the result was an even more solid debt structure, since less exposed to both refinancing and interest rate risks. This was due to the combination of both issuance policy and the above detailed bond exchange and buyback transactions. Trends in risks embedded in a debt portfolio may be assessed through some specific indicators. They are shown in Tables III.7 and III.8 and allow to assess trends recorded in recent years under different profiles, featuring the main synthetic metrics of the exposure of the government securities stock to refinancing and interest rate risks, as resulting from the issuance policies and bond exchange and buyback transactions carried out in 2017. Such indicators show how actual evolution of these risks is in line with the objectives set out in Chapter I, even apart from the additional contribution of derivatives transactions, which also affects these metrics.
MINISTRY OF ECONOMY AND FINANCE 84 III. PUBLIC DEBT MANAGEMENT IN 2017
TABLE III.7: AVERAGE LIFE OF GOVERNMENT BONDS STOCK (years) Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017
Domestic bonds 6.38 6.62 6.78 Foreign bonds 11.01 12.07 11.88 Government bonds stock 6.52 6.76 6.90
TABLE III.8: DURATION AND ARP TREND 2015-2017 FOR THE GOVERNMENT BONDS STOCK, BEFORE DERIVATIVES (years) Duration ARP Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Domestic bonds before 5.45 5.50 5.47 5.39 5.62 5.74 derivatives Foreign bonds before 6.45 7.11 6.96 6.11 6.69 6.49 derivatives Government bonds stock before 5.48 5.54 5.50 5.41 5.64 5.76 derivatives
With reference to refinancing risk, overall average life of all government securities at December 31, 2017 was equal to 6.90 years, further increasing compared to that of December 31, 2016 (6.76 years). In 2017, therefore, the debt average life, which had progressively reduced from 2011 to 2013, and had essentially stabilized in 2014, kept on in the upward path already started in 2015 and continued in 2016. As for interest rate risk, a slight decrease was instead recorded in government bond stock financial duration13 figure, which stood at 5.50 years at December 31, 2017, compared to 5.54 years at the end of 2016. This is essentially due to the sensitivity of this indicator to market rates, that were higher at the end of 2017 than at the end of 2016, both with reference to government securities yields and swap rates. On the contrary, government securities stock’s ARP (Average Refixing Period) maintained an increasing trend, shifting from 5.64 years at the end of 2016 to 5.76 at the end of 2017, thus signaling an associated reduction in the portfolio risk profile. The trend of the latter indicator is furthermore reflected in the following Chart III.18, which shows changes in the residual maturity structure of government securities stock at the end of each of the last three years (excluding BOTs and Commercial Paper). In summary, the Chart shows how in each financial year the portfolio percentage distribution by classes of residual maturity has changed, as a result of the combination of the "original" structure of securities expiring in the year and the maturity structure of securities issued that same year. First of all, it must be observed the 2017 decrease in securities with a residual maturity below
13 For more detailed information on the meaning of the main quantitative metrics of interest rate risk (including Duration and Average Refixing Period), please refer to the dedicated focus in the Public Debt Report 2014 (pages 22-23). For further information about methodological changes adopted to calculate the contribution of derivatives to the total debt Duration and ARP, please refer to chapter IV of the Public Debt Report 2015, in particular to notes 4 on page 81 and 5 on page 82. All the Report past editions are available at the web address indicated in note 9 of Chapter I.
MINISTRY OF ECONOMY AND FINANCE 85 2017 PUBLIC DEBT REPORT
one year, as well as the stability of bonds maturing between 1 and 3 years. All securities with residual life of more than 3 years are instead increasing, with the exception of the segment between 7 and 10 years. In summary, in 2017 about 1% of the overall residual maturity classes was redistributed from the maturities up to 5 years to those with a longer one. Reduction of the component of residual life up to 3 years was even more significant, resulting in more than 2%. The trend reflects Treasury’s multi-year effort to reshape the portfolio toward the medium-long term end.
CHART III.18: MATURITIES FOR RESIDUAL LIFE CLASSES 2015 TO 2017 25% 2015 2016 2017 20%
15%
10%
5%
0% < 1 year 1 - 3 years >3 - 5 years >5 - 7 years >7 - 10 years >10 years
Note: the stock of inflation-indexed securities takes into account the revaluation of the capital accrued at the end of each year and securities in foreign currencies are valued after currency swaps.
Derivatives portfolio management in 2017 was also consistent with the goals set. Indeed, the derivatives portfolio helped to lengthen total debt duration during the year, raising it from a 5.50 before-swap figure to the 6.01 after-swap one (roughly a 6 months increase), as detailed in the following Table III.9. Consistently, the derivatives portfolio also contributed to lengthen the debt ARP: at the end of 2017, overall after-swap ARP stood at 6.25 years, approximately 6 months higher than the corresponding before-swap figure of 5.76 years, while also higher than the 6.21 years after-swap figure recorded at December 31, 2016.
TABLE III.9: DURATION AND ARP TREND 2015-2017 FOR GOVERNMENT BONDS, AFTER DERIVATIVES (years) Duration ARP Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Domestic bonds after 6.04 6.09 5.99 6.04 6.19 6.23 derivatives Foreign bonds after-derivatives 6.55 7.13 7.05 6.50 7.07 6.96 Government bonds after- 6.06 6.11 6.01 6.05 6.21 6.25 derivatives
MINISTRY OF ECONOMY AND FINANCE 86 III. PUBLIC DEBT MANAGEMENT IN 2017
Trend of the debt stock market value The well-known inverse relationship between trends in interest rates and market values structurally entails that, other conditions being equal14, in lower- than-previous rates market phases all fixed-rate financial instruments that had previously been settled to higher rates take a negative market value to the fixed- rate payer and a positive one to the receiver. This is irrespective of the contractual nature of the instrument, i.e. regardless of whether the fixed rate is paid on the issued securities or under other instruments, such as derivatives. Market rates at the end of 2017, despite modest increases compared to 2016, continued to record historically unprecedented low figures. This led, in fact, to a current negative value of any fixed rate payer position that was previously taken15. Consequently, given the rate structure of the related portfolios: 1. Mark-to-market value of the derivatives portfolio was negative for € 31.5 billion at December 31, 2017 compared to € 38.3 billion at December 31, 2016. Taking into consideration only debt-related derivatives16 (see Table III.10), market value was negative for € 31.3 billion at the end of 2017 compared to € 37.9 billion at the end of 2016; 2. market value of the government securities stock (excluding the effect of the derivatives portfolio) went from about € 2,106.0 billion at 2016 year-end to € 2,105.2 billion at the end of 2017, thus a minor change. On the contrary, as shown in Table III.10, nominal amount of government bonds stock increased by approximately € 39.2 billion. Difference between government bonds stock market value and nominal value thus amounted to about € 199 billion at the end of 2017 compared to the € 239 billion at the end of 2016, decreasing by around € 40 billion. The basically stable government securities market value (only decreasing by € 845 million) may therefore be attributed to two opposite factors that offset one another. On the one hand, an increase in the nominal stock of securities for around € 39.2 billion; on the other hand, a reduction (around € 40 billion) in the market value, resulting from increases recorded in government interest rates.
14 The phenomena described here are related to the market component of interest rates, while changes in the interest rate component remunerating credit risk may record amplitude and direction that are actually independent from those of the market rates. Therefore they may, should very significant and/or lasting changes in credit spreads occur, amplify or mitigate (depending on the direction of credit spread movement) the effects of changes driven by interest rate market. 15 As can be seen, therefore, the mere existence of a negative (or positive) mark to market value does not represent neither a loss nor a profit to the issuer, nor a valid indicator of the quality of the choice to "lock-in" the rate or not. Formation and trend of mark-to-market value are instead stemming from the relationship between the portfolio features (as gradually built over time on the basis of the well-known trade-off between costs and risks faced by DMOs in relation to portfolios’ features, market absorption capacity and current fiscal targets) and the subsequent - completely exogenous - trend in market rates. To public debt managers, the choice to "lock-in" debt rates serves the goal of curbing risks for the public budget, and is not intended to take a position aiming to "beat the market". 16 In this case, derivative contracts concluded with reference to the loans receivables under the 2005 Finance Act are excluded.
MINISTRY OF ECONOMY AND FINANCE 87 2017 PUBLIC DEBT REPORT
TABLE III.10: MARKET VALUE TREND OF GOVERNMENT BONDS STOCK (€ million) MtM Nominal Value MtM – Nominal Value
12/31/2017 2,105,186 1,906,389 198,798 12/31/2016 2,106,030 1,867,214 238,816 Change -845 39,175 -40,018
The performance recorded by the market values of the two portfolios (derivatives and bonds) reflects the trend in reference interest rates curves: swap curve for the derivatives portfolio and government bonds yield curve for government bonds stock. These curves can move in different directions and/or with different variations and inclinations, thus generating effects that can diverge from year to year. The Euro swap rates curve and the yield curve for Italian government bonds are shown below, with reference to the dates of 12/31/2016 and 12/31/2017 (Chart III.19). Both curves show a steepening, with a further lowering of the shorter-term segment and an increase from 5 years onwards for the government bonds curve, and from 2 years onwards for the swap curve. Moreover, the government bonds curve was affected in some segments - in particular the short and medium (up to 10-year maturity) and the ultra-long (over 30-year maturity) - by the positive effect of narrowing credit risk premium required by the market.
CHART III.19: EURO SWAP RATES AND ITALIAN GOVERNMENT BONDS YIELD CURVES
3.9 Swap rate curve Dec. 31, 2016 Swap rate curve Dec. 31, 2017
3.4 Government bonds yield curve Dec. 31, 2016 Government bonds yield curve Dec. 31, 2017
2.9
2.4
1.9
1.4
0.9
0.4
-0.1
-0.6
1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y
3M 6M
10Y 11Y 12Y 15Y 20Y 25Y 30Y 35Y 40Y 45Y 50Y Source: Bloomberg
The following Table III.11 provides notional amount and market values of all segments in which the derivatives portfolio can be divided. As regards debt- related derivatives, cross currency swaps (CCSs) refer to foreign currencies issues, while hedging IRSs refer to euro-denominated securities issued under the MTN Program. Furthermore, the "Duration IRS" category includes all the positions related to the policy of protection against rising interest rates, which, in some cases, are coupled with the sale of receiver swaption. The "IRS ex-ISPA" item includes all derivative contracts associated with the liabilities of the company
MINISTRY OF ECONOMY AND FINANCE 88 III. PUBLIC DEBT MANAGEMENT IN 2017
Infrastrutture S.p.A., which were transferred to the Treasury by the Finance Act for 2007. The "Swaption" category includes the stand-alone receiver swaptions, i.e. those uncoupled with pre-existing IRSs. Finally, the Table provides both values relating to the overall portfolio, including derivatives on assets .
TABLE III.11: DERIVATIVE INSTRUMENTS PORTFOLIO - 2016 AND 2017 (€ million) Derivatives on debt Dec. 31, 2016 Dec. 31, 2017 Instrument Notional in % MtM in % Notional in % MtM in % IRS ex-ISPA 3,500 2.44% -1,542 4.06% 3,500 2.76% -1,349 4.31% CCS (Cross Currency Swap) 8,992 6.26% 875 -2.31% 6,007 4.74% 196 -0.63% IRS (Interest Rate Swap) for 10,357 7.21% 808 -2.13% 10,115 7.98% 735 -2.35% hedging purposes IRS (Interest Rate Swap) for 113,782 79.24% -34,437 90.75% 103,627 81.71% -28,528 91.13% duration purposes Swaption 6,959 4.85% -3,650 9.62% 3,569 2.81% -2,630 7.54% Total derivatives on debt 143,590 100.00% -37,946 100.00% 126,818 100.00% -31,306 100.00% Outstanding government 1,867,214 1,906,389 securities Derivatives on debt 7.69% 6.65% /Government securities
Derivatives on assets (2005 Finance Act) Instrument Notional MtM Notional MtM IRS (Interest Rate Swap) 2,341 -346 1,835 -232
Total derivatives portfolio Instrument Notional in % MtM in % Notional in % MtM in % Derivatives on debt 143,590 98.40% -37,946 99.10% 126,818 98.57% -31,306 99.26% Derivatives on assets 2,341 1.60% -346 0.90% 1,835 1.43% -232 0.74% Total derivatives 145,931 100% -38,292 100% 128,653 100% -31,538 100% Note: The MtM reported in this table is calculated by MEF for its management purposes, thus not matching figures published by the Bank of Italy in the Financial Accounts Series of. In these latter – as aiming at strictly statistical purposes - a part of MtM is reclassified as a debt, according to the provisions of the Manual on government deficit and debt issued following the entry into force of the European System of National and Regional Accounts ESA 2010.
In detail, three CCSs expired in 2017, following the maturity of corresponding foreign currency denominated issues. In addition, a hedging position - consisting of a CCS and a cancellable IRS - was closed, as linked to a foreign currency (JPY) denominated bond which was early redeemed, as indicated in Section III.3. Total notional amount of the four CCSs was about € 2.785 billion, while that of the cancellable IRS, included among the hedging IRSs, was around € 203 million. In the “Duration IRS” category, five IRSs with a total notional value of 16 € billion have expired in 2017, while four new IRSs, with a total notional amount of € 3.5 billion, were originated in conjunction with the exercise of four swaptions in 1Q2017 as described above in this Chapter. In addition, an IRS with a notional value of € 2.5 billion was generated by a receiver swaption which was exercised in 2017. Finally, a position composed of an IRS of € 1.5 billion, a forward starting IRS for another € 1.5 billion and a set of quarterly installments distributed over time for a total € 845 million to be paid to the counterparty, was derived from the restructuring of an IRS with a notional amount of € 1.5 billion, as fully detailed in Section III.3. Among the stand-alone receiver swaptions, further to the four mentioned above, a
MINISTRY OF ECONOMY AND FINANCE 89 2017 PUBLIC DEBT REPORT
swaption for a notional amount of € 2 billion was assigned and then restructured, as outlined above in this Chapter. This restructuring also resulted in the payment to the counterparty of the premium (spread according to an amortization schedule) for a total amount of € 225 million. With regard to debt-related derivative instruments (thus excluding positions taken on loans receivables under the 2005 Finance Act), the following two charts show the scheduled trend of the notional year by year, starting from 12/31/2016 and 12/31/2017 until the last scheduled maturity in the portfolio (2062), assuming that all the swaptions currently in the portfolio will be exercised. After 2050, the last year in which an IRS with a significant notional amount (€ 2 million) is scheduled to come to maturity, just one position will still outstand (for a notional amount of € 250 million, underlying a security issued under the EMTN program), scheduled to expire in 2062. Considerable notional amounts are scheduled to expire between 2018 and 2019.
CHART III.20 EXPECTED EVOLUTION IN NOTIONAL AMOUNT OF THE DERIVATIVES PORTFOLIO IF SWAPTIONS ARE EXERCISED (€ million)
135,000 31/12/2016 120,000 31/12/2017 105,000 90,000 75,000 60,000 45,000 30,000 15,000
-
2043 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2044 2045 2046 2047 2048 2049
2050-2062
CHART III.21: STRUCTURE BY MATURITY OF THE DERIVATIVES PORTFOLIO IF SWAPTIONS ARE EXERCISED (€ million)
16,000 Derivatives on foreign bonds Dec. 31, 2016 14,000 Other derivatives Dec. 31, 2016 12,000 Derivatives on foreign bonds Dec. 31, 2017 Other derivatives Dec. 31, 2017 10,000 8,000 6,000 4,000 2,000 0
MINISTRY OF ECONOMY AND FINANCE 90 III. PUBLIC DEBT MANAGEMENT IN 2017
Debt cost Weighted average cost of new issues slightly increased in 2017, to 0.68% from 0.55% in 2016. As outlined in Chapter II and in the paragraphs of this Chapter relating to issuance activity, market conditions were on average slightly less favorable for Italy than in 2016, while allowing a funding cost close to historic lows.
CHART III.22: AVERAGE COST AT ISSUANCE OF GOVERNMENT SECURITIES – 2005 TO 2017
4.50% 4.14% 4.09% 4.00% 3.61% 3.50% 3.11% 3.00% 3.32% 2.50% 2.08% 2.47% 2.00% 2.18% 2.10% 1.50% 1.35% 1.00% 0.70% 0.50% 0.55% 0.68% 0.00% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
In terms of cash, average 2017 cost of debt, calculated as the ratio between interests17 cash outlays paid on government securities in year t on the government bond stock of year t-1, was equal to 2.89 %, compared to 3.16% in 2016, thus decreasing by 0.27%. Taking in account the overall effect of derivative transactions, total 2017 cash cost was 3.07%, compared to 3.39% of 2016, thus decreasing by 0.32%. Consistently, the impact of the derivatives portfolio also decreased (0.18% compared to 0.23% in the previous year). Cost differential between before- and after-derivatives debt portfolio represented the additional cost incurred by Treasury to get a longer duration than the one stemming by bond issues, hence better hedging against the risk of a rise in interest rates. At the end of 2017, average rate of the paying leg of duration derivatives was 4.14%, furtherly decreasing compared to 4.19% in 2016 and 4.35% in 201518. At the same date, outstanding debt stock with coupons exceeding 4.14% was equal to approximately € 629 billion, thus confirming that average rate paid on the portion of debt hedged by interest rate derivatives is well within the range of the historic cost of the country’s fixed-rate debt.
17 It is not possible to make such comparison on the expenditure on accrual basis (ESA 2010) as this – by definition - does not include derivatives transactions flows. 18 Improvement is essentially due to two components: • the effects of the restructurings carried out during the year; • the natural maturity of some transactions.
MINISTRY OF ECONOMY AND FINANCE 91 2017 PUBLIC DEBT REPORT
It is worth recalling that, when drafting public finance forecasts featured in the planning documents, as well as in the Government budget, the effect produced by the derivatives is fully taken into account, with underlying assumptions consistent with the rest of the estimates. Similarly, all the balance sheet final figures include the effects of the amount collected or spent with regard to derivatives activity.
CHART III.23: AVERAGE COST OF GOVERNMENT BONDS STOCK, BEFORE AND AFTER DERIVATIVES – 2005 TO 2017
4.50 4.00 3.50 3.00 2.50 % 2.00 1.50 1.00 0.50 0.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Before derivatives 4.12 4.11 4.27 4.29 3.79 3.61 3.75 3.85 3.73 3.70 3.39 3.16 2.89 After derivatives 4.06 4.15 4.31 4.37 3.85 3.73 3.88 4.09 3.90 3.89 3.55 3.39 3.07
III.5 TREASURY CASH MANAGEMENT
Managing liquidity held at the Treasury Cash Account – in short, cash management - has played an increasingly important role among debt management activities, although in the last three years some endogenous and exogenous factors have made it challenging. The market context in which the Treasury had to operate was fairly unchanged compared to the previous year. ECB rates, and in particular the Deposit facility which remained at -0.40%, did not change with respect to 2016, being still affected by expansionary monetary policies pursued in the last three years. While these policies were beneficial to government bonds market in terms of declining yields and increasing demand, on the other hand they made managing Treasury liquidity undeniably more challenging. Indeed, the Treasury had to manage considerable amounts of cash in a context marked by a record-low liquidity demand and negative yields. Therefore, even in 2017 transactions essentially aimed at curbing costs stemming from the severe penalization to be applied to deposits held at the Bank of Italy and from a market in which negative rates continued to be the commonplace practice.
MINISTRY OF ECONOMY AND FINANCE 92 III. PUBLIC DEBT MANAGEMENT IN 2017
The Treasury managed its liquidity through the OPTES operational framework, which, as described in Chapter I, provides for the monitoring of Treasury balances and cash flows (through a steady information exchange between MEF and the Bank of Italy), as well as for the use of cash management transactions, that is daily auctions and bilateral transactions carried out with selected counterparties allowing to lend or borrow liquidity on the money market.
Monitoring of the Cash Account and the daily and monthly state of liquid balances Efficient liquidity management moves from monitoring the Cash Account and assessing performance of the balances, both daily and monthly. As stated in Chapter I, activity is based on a daily information sharing between the MEF (State General Accounting Department and Treasury Department) and the Bank of Italy, including estimates and final data about all receipts and payments made at the accounts held at the State Treasury, as well as the resulting estimate about the Cash Account balance trend.
The above-mentioned information are updated by the Bank of Italy six times a day and validated by the MEF, in order to estimate end-of-day balance on a daily basis, while also sharing a longer-term, 30- to 60-day forecasting scenario, updated weekly. This latter information exchange plays a major role for monetary policy, since Treasury communicates to the Bank of Italy, and through it to the ECB, its forecasts on liquidity situation and the balance of Government deposits. Despite the complexity of Treasury flows, mainly due to the large number of entailed entities and the size of certain cash flows, also in 2017 the monitoring of the Cash Account gave satisfactory outcomes in terms of foresight, as average daily gap with actual figures was slightly over 3%19.
Thanks to Cash Account monitoring and management it was therefore possible to achieve sound balance forecasts, although in some days of each month huge Treasury flows lead to sudden changes in liquidity balance, reaching several billion euros. Such a strong monthly volatility in the Account’s balance is shown in the following Chart, providing average fluctuations observed in 2017, similar to those recorded in previous years20.
19 This figure is calculated as an average of percentage changes in forecasted amounts of the Cash Account balance as estimated at 6 p.m. on the day t-1 and the actual balance recorded at 9 a.m. on the day t. This percentage therefore provides a measure of the average gap of the daily forecast. 20 On this subject, see Sections IV.4 of the Public Debt Reports for the years 2014-16.
MINISTRY OF ECONOMY AND FINANCE 93 2017 PUBLIC DEBT REPORT
CHART III. 24: 2017 AVERAGE INTRA-MONTHLY VARIATIONS IN TREASURY LIQUIDITY: DEVIATIONS FROM THE MONTHLY LOW (€ million) 25,000
20,000
15,000
10,000
5,000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Day of the month
As can be seen from Chart III.24, the first half of the month balances usually show a downward trend or low figures, due to large payments (e.g. social security payments), then suddenly rise from mid-month, peaking in the third week, mainly thanks to tax receipts. These sudden fluctuations do not ease cash management purposes, since the Treasury must hold large amounts of cash also to meet substantial government securities maturities, which are not always matched by similar inflows stemming by new issues, especially for medium and long term bonds. Indeed, according to market practice, issues of securities other than BOTs are usually spread in several tranches over a period of some months, while relevant redemptions take place in a single payment on maturity date. Fluctuations shown in the Chart are therefore also due to issues and, above all, to securities became due, which sometimes contribute to the significant drop in the first half of the month.
The Account volatility is not only recorded at an intra-monthly level, but also at a year scale. In this regard, the following Chart III.25 shows differences between the low and high in balances recorded in each month of the years 2016- 2017. This Chart shows different results from those of the previous one, which is based on average monthly data therefore partially mitigating fluctuations (since peak days do not coincide in all months, above all for calendar factors). Monthly data shows that the Account volatility in 2017 was in line with the previous year, as the average gap between the monthly low and high amounted to about € 29,3 billion, slightly declining compared to about € 29,7 billion in 2016.
MINISTRY OF ECONOMY AND FINANCE 94 III. PUBLIC DEBT MANAGEMENT IN 2017
CHART III.25 GAP BETWEEN THE MONTHLY HIGH AND LOW OF TREASURY AVAILABLE CASH 2016-17 (€ million) 60,000 2016 2017 50,000
40,000
30,000
20,000
10,000
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Generally, 2017 monthly trend were comparable to the previous year, with a significant mismatch in June and November, due to differences in government bond maturities’ timetable.
Taking into account the wide daily and monthly balance changes caused by highly-volatile inflows and outflows, sometimes mismatching, the challenge of cash management is therefore to lend an amount of liquidity on the money market in order to reduce net daily variations, while at the same time allowing the Treasury to keep an adequate supply of cash, in order to prudently face substantial redemptions and payments.
Cash management transactions and market context As stated, 2017 market context and cash management transactions were strongly affected by the ECB's monetary policy decisions. In fact, abundant liquidity available on the market led to a substantial lack of demand by banks, then increasing liquidity held at the Treasury Cash Account. Nevertheless, for the whole 2017 the Treasury maintained its presence on the money market through daily auctions, ensuring continuity with the previous year. As can be seen from the following Chart III.27, average lending in Treasury OPTES auctions gradually decreased starting from the ECB decisions of June 2014, then further accentuated by the introduction of the PSPP and its subsequent extensions.
MINISTRY OF ECONOMY AND FINANCE 95 2017 PUBLIC DEBT REPORT
CHART III.26 - AVERAGE USE AT DAILY OPTES AUCTIONS (€ million)
Beginning of 6,000 LTRO redemptions BCE decisions of June 5, 2014 5,000
First 4,000 LTRO auction
Second 3,000 TLTRO auction
2,000 Increase in Beginning of QE purchases Decrease in BCE QE QE purchases 1,000
0
The following Chart III.27 compares the weighted average rate at OPTES auctions with the EONIA rate (Euro OverNight Index Average) for the years 2014- 17. As can be seen, the progressive reduction in official rates by the ECB led to a gradual reduction in yields on the money market. Until mid-2014 temporary increases in rates were recorded at the end of the month, when counterparties increased their demand for liquidity on the market. Progressive increase in liquidity within the Eurosystem has gradually made this cyclical phenomenon disappear.
CHART III.27: OVERNIGHT RATES TREND ON THE MONEY MARKET AND AT OPTES AUCTIONS –2014 TO 2017 (percentage rates) 0.80 Weighted average rate Eonia 0.60
0.40
0.20
0.00
-0.20
-0.40
-0.60
Jul-14 Jul-15 Jul-16 Jul-17
Apr-16 Apr-14 Apr-15 Apr-17
Jan-14 Jan-14 Jan-15 Jan-16 Jan-17
Oct-14 Oct-15 Oct-16 Oct-17
Jun-14 Jun-15 Jun-16
Sep-14 Sep-15
Mar-14 Mar-15 Mar-16
Feb-14 Feb-17
Aug-14 Aug-16 Aug-17
Dec-14 Dec-15
Nov-17 Nov-14 Nov-16 May-17 May-14
MINISTRY OF ECONOMY AND FINANCE 96 III. PUBLIC DEBT MANAGEMENT IN 2017
The gap between EONIA rate and weighted average yield at auctions is attributable to the level of the minimum rate accepted by the Treasury in the OPTES transactions, which was kept at zero from June 2014 to December 2015. When two further cuts in monetary policy rates were announced in December 2015 and March 2016, the Treasury was no longer able to keep the minimum acceptable rate at zero, so reduced it, but at higher levels than those prevailing on the market for the same one-day maturity. As a result, throughout 2017, with the exception of rare episodes, weighted average rate remained a few basis points above the EONIA rate, overlapping the level of the accepted minimum rate.
Use of Treasury liquidity Cash management tools available to the Treasury for the use of liquidity held at the Cash Account are overnight auctions and long-term bilateral operations. Also in 2017, OPTES lending auctions took place daily, as average daily amount placed on the overnight maturity were in line with the previous year (€ 454 million in 2017 compared to € 441 million in 2016). Few counterparties were active in the auctions, due to the persistent conditions of high liquidity in the market. The Chart below shows how average monthly placements at OPTES auctions dramatically decreased starting from 2H2014.
CHART III.28 - AVERAGE LENDING AT DAILY OPTES AUCTIONS – 2014 TO 2017 (€ million) 6,000 2014 2015 5,000 2016 2017 4,000
3,000
2,000
1,000
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
As known, starting from 2H2014, the Treasury has abolished term deposits opened at the Bank of Italy, aimed at holding there the most stable part of Treasury liquidity. This measure followed the entry into force of important ECB decisions penalizing deposits held by governments at central banks, thus making this tool useless for the purposes for which it was created. Therefore, the Treasury shifted to another cash management tool, using this liquidity in long- term bilateral operations.
MINISTRY OF ECONOMY AND FINANCE 97 2017 PUBLIC DEBT REPORT
As with overnight auctions, the average size of bilateral operations declined, while however remaining the most widely used among liquidity placement instruments; indeed, in 2017 it amounted to € 29,7 billion, compared to the approximately € 41 billion of the previous year. On the contrary, the average maturity of these transactions increased, from 27 days in 2016 to 35 days in 2017. Increase in average length, also fostered by the stabilization of balances, allowed to curb the impact of negative rates, more marked on the very short-term maturities. Also in 2017, given high liquidity available, the Treasury did not need to resort to OPTES auctions for funding purposes.
CHART III.29 AVERAGE LIQUIDITY DISTRIBUTION BY TYPE OF PLACEMENT – 2017 (€ million and percentage rates) Overnight auctions 448 (1%)
Bilateral Cash Account operations 17,963 29,766 (37%) (62%)
Chart III.29 summarizes the types of placement of Treasury’s liquidity, according to the distribution observed throughout the year. As already observed last year, due to the particular market situation, placements in overnight auctions were absolutely marginal, while the larger part of the liquidity was lent under longer-term bilateral transactions (about 62% of the total). Remaining liquidity was deposited at the Cash Account, whose average balance rose to 37%. The following Table III.12 shows the total amount of Treasury liquidity at the end of each month of 2017, with the breakdown between market transactions and Cash Account.
MINISTRY OF ECONOMY AND FINANCE 98 III. PUBLIC DEBT MANAGEMENT IN 2017
TABLE III.12 –CASH ACCOUNT BALANCES AND PLACEMENTS OF TREASURY LIQUIDITY AT MONTH-END – 2017 (€ million)
Month Balance of Cash OPTES Liquidity Operations Total Treasury Liquidity Account (auctions + bilateral held at the Bank of operations) Italy January 41,174 35,920 77,094 February 20,427 35,990 56,417 March 17,902 36,160 54,062 April 22,613 35,350 57,963 May 28,108 30,340 58,448 June 16,000 36,150 52,150 July 49,198 35,900 85,098 August 26,652 36,120 62,772 September 15,348 36,110 51,458 October 17,128 35,310 52,438 November 14,928 17,880 32,808 December 6,550 22,500 29,050
The table shows three different situations: a) a high Cash Account balance recorded in 2017, largely held for prudential purposes, in order to deal with huge government securities redemptions21; b) the peak of the month of July, determined both by tax revenues performance and by a lack of scheduled medium- to long-term securities redemptions c) the decrease in the Treasury liquidity recorded in November and December 2017. This last point was mainly affected by two factors: the redemption of about € 45 billion of government securities in November and the many extraordinary transactions carried out by the Treasury concentrated in last two months of the year22. These latter entailed not only a reduction in the public debt stock but also, as said, a corresponding decline in the liquidity at the Cash Account.
Conclusions Cash management activity in 2017 was – as in the previous year - particularly challenging due to ongoing difficult conditions on the money market. However, the Treasury always ensured its daily presence in the market through OPTES operations, in order to reduce, as far as possible, the impact of negative rates on its liquidity. In any case, despite the above mentioned difficulties, it should be recalled that the overall effect of low interest rates and other quantitative easing measures is favorable for our country’s public debt management.
21 For details, see the chart in Chapter I "Monthly profile of maturities - medium-long term securities for the years 2017-2018". 22 On this point, see also the paragraph "Extraordinary debt exchange and buyback transactions".
MINISTRY OF ECONOMY AND FINANCE 99 2017 PUBLIC DEBT REPORT
MINISTRY OF ECONOMY AND FINANCE 100 ANNEXES
ORGANISATIONAL STRUCTURE OF THE PUBLIC DEBT DIRECTORATE AT TREASURY DEPARTMENT
The Second Directorate of the Treasury Department, in charge to manage public debt, encompasses eleven Offices. Its responsibilities are carried out in close institutional collaboration with other entities, including other Directorates of the Treasury Department, the General Accounting Department of the State and the Bank of Italy. The chart below shows the responsibilities of the Public Debt Directorate grouped by function.
ORGANISATION OF THE PUBLIC DEBT DIRECTORATE
Ministry of the Economy and Finance
Department of the Treasury
Public Debt Directorate
General Affairs, le- Communications: External relations: Monitoring of the debt gal/administrative issues Public debt website International institutions of Local Authorities Programs and prospec- Government securities (EU, IMF, OECD) and na- Potential non-recurring tuses for National and statistics tional institutions financial transactions International issues (ISTAT, Bank of Italia, with Local Authorities Legal documentation for CONSOB) derivatives Investors / Rating Agen- cies
FRONT OFFICE MIDDLE OFFICE BACK OFFICE Markets monitoring, as- Portfolio risk indicators Issuance Decrees sessment of Specialists in Simulation of debt man- Transactions settlement government bonds agement strategies with Accounting management Issuance of domestic securi- cost/risk scenarios ties Counterparty risk manage- Issuance of international ment securities Development of interest Liquidity management rate scenarios Debt exchanges and buy- Forecasts for planning doc- backs (including Sinking uments Fund for government securi- Institutional reporting ties) Derivatives
The Directorate features the typical functions of financial market operators usually also included in other Debt Management Offices (DMOs) managing public debt in advanced countries: Front, Middle and Back Office functions. The Front Office gathers all the activities entailing direct interaction with the market. The main ones are those related to the issuance of securities in the pri-
MINISTRY OF ECONOMY AND FINANCE 101 2017 PUBLIC DEBT REPORT
mary market (both domestic and foreign) aimed at matching funding needs. They also include market analysis to identify the types of securities to be offered as well as the placements’ features and timing. Front Office's operations also include very short-term cash management operations, debt exchanges and buybacks, as well as derivatives transactions. Finally, Front Office activities also include moni- toring the several segments of the Government bonds secondary market, as well as selecting and assessing Specialists in Government bonds. Risk Management functions are performed by the Middle Office, encompassing all the analyses (including the market and legal ones) needed to draw the cost/risk profile that will drive the Front Office in selecting / rejecting opera- tions. The assessment of different issuance portfolios with their respective cost / risk combinations allows Front Office to select the most suitable issuance and hedging strategies. Since many years1, this assessment is grounded on a proprie- tary software that allows Cost-at-Risk analysis on a probabilistic model. The Mid- dle Office is also in charge of monitoring counterparty risk, from which the con- straints to be satisfied for both managing the derivatives portfolio and for liquidity lending operations are derived. Multi-year estimates about interest expenditure and debt redemptions for the purposes of planning documents and institutional reporting2 are also included in Middle Office duties. Back Office's functions include drafting issues authorization decrees and the (more strictly accounting) activities relating to procedures for a timely payments execution. All debt management duties are underpinned by legal documentation drafting activities for bonds and derivatives, as well as for prospectuses, both for interna- tional issuance programs (Global, MTN) and for other securities placed in other ways than auctions. Likewise, since the Public Debt Directorate falls within the administrative context of the Department of the Treasury, all other legal- administrative and accounting functions that are shared with the Ministry struc- ture are carried out here. Other pivotal functions are also carried out by the Public Debt Directorate. Among these, very noteworthy ones are those that can be classified as communi- cation tasks, focusing on real-time information about issuance activities as well as statistics about structure, dynamics and composition of Government securities and relevant market. The Public Debt website is the main channel for these purposes. Statistics about Local Authorities’ debt and exposure to derivatives also fall within this function.
1 See information about the SAPE software – initially funded by the Italian Ministry for the University and Research (MIUR) in 2003 – in the Chapt. I above as well in the 2014 Public Debt Report, from page 26. 2 In particular, the Economic and Financial Document (DEF) provided for by Law no. 39 of 7 April 2011 (where the contribution of the Second Directorate is included in Part One, "Stability Program", and in Part Two, "Public Finance Analysis and Trends"), the DEF Update Note, the Budgetary Programming Document (DPB) established by Regulation EU no. 473/2013, the Appendix to the so-called Quarterly Cash Report (with Article 14 of Law 196/2009 referred to as the Report on the Consolidated Cash Account of the Public Administrations), the Parliamentary Report on the Sinking Fund for Government Securities (attached to the General Budgetary Statement) as per Article 44, Paragraph 3 of Presidential Decree 398/2003, and the half-yearly report to the Court of Auditors on the management of public debt pursuant to the Ministerial Decree of 10/11/1995.
102 MINISTRY OF ECONOMY AND FINANCE ANNEXES
In addition to the aforementioned monitoring, any extraordinary (i.e. per- formed according to specific rules) transaction regarding Local Authorities debt is also a task of this Directorate. Of great importance is also the task of liaise with other (mainly international) institutions, which includes: participating in European DMOs co-ordination within a special sub-committee (European Sovereign Debt Markets - ESDM) of the Economic and Financial Committee of the European Union3; participating in Eurostat's statis- tical working groups and contributing to draft semi-annual notifications under the Excessive Deficit Procedure (EDP); attending the several working groups in supra- national institutions such as OECD and IMF; co-managing the Public Debt Manage- ment Network among Italian Treasury, OECD and World Bank about public debt management topics; keeping up liaisons with institutional investors and rating agencies. Finally, IT provides cross-functional support that affects all the Directorate offices, since virtually all of the Directorate's work processes are computer-based: those that are common to the whole Administration, by sharing applications with the Treasury Department or the entire Ministry, while those that are specific to Public Debt tasks enjoy dedicated tools. Indeed, applications4 are designed on the basis of the needs of the Directorate (see, for example, particularly important aspects in the processing and management of SAPE – the Issue Portfolio Analysis Software illustrated in Chapter I). Received data comes from both internal sources and from data flows from the Bank of Italy, Monte Titoli SpA - the company that guarantees the centralised management of Government securities - or the company that manages the Government bond market (MTS S.p.A.).
3 Further details about the several international forums, committees and meeting in which the Treasury is involved are provided in the Chapt. I above. 4 Databases’ design and maintenance, as well as applications’ development, are carried out in collaboration with the IT coordination office at Treasury’s Department and with SOGEI, the latter as a provider of digital architectures and support services. SOGEI - Società Generale d’Informatica S.P.A. is an IT company, 100% owned by the Ministry of Economy and Finance.
MINISTRY OF ECONOMY AND FINANCE 103 2017 PUBLIC DEBT REPORT
STATISTICAL ANNEX
Information sources about Public Debt available at Treasury’s website
Treasury’s website hosts a dedicated area about public Debt (http://www.dt.tesoro.it/en/debito_pubblico/index.html), featuring a wide range of both qualitative and quantitative information about each one of the operational issues included in this Report. Information available in this area provides details about (but is not limited to) issuance timetable and official communications, auction results, securities features and relevant legal framework, Specialist’s assessment and extraordinary transactions, available cash as well as documents of a more general nature, as the several releases of this Report or the annual Guidelines for the public Debt management. The area also includes a data-rich statistical Section (http://www.dt.tesoro.it/en/debito_pubblico/dati_statistici/) providing quantitative information about all public Debt topics, namely featured in the Quarterly Bulletin, including trends recorded in government securities’ portfolio composition, coupons, yields at issuance and average life, risks indicators and derivatives portfolio. The dataset is steadily updated according to operations, while also keeping available past data series. The following pages complete the information already provided in this Report by featuring selected Charts and Tables about some of the information available in the website.
104 MINISTRY OF ECONOMY AND FINANCE ANNEXES
Tables and Charts
GROSS ISSUES AT NOMINAL VALUE – SECURITIES UP TO TWO YEARS (euro millions) BOT CTZ flexible 3 month 6 month 12 month 24 month Jan-14 16,943 9,305 5,955 Feb-14 8,618 8,000 2,875 Mar-14 8,250 7,566 2,875 Apr-14 7,700 7,500 3,500 May-14 7,150 7,150 3,450 Jun-14 8,250 7,150 2,875 Jul-14 7,163 6,500 2,588 Aug-14 7,500 7,700 3,074 Sep-14 7,700 9,075 2,902 Opt-14 6,556 8,015 2,875 Nov-14 6,104 6,500 Dic-14 6,011 Jan-15 15,400 8,413 4,977 Feb-15 7,344 7,700 3,812 Mar-15 7,062 6,502 2,300 Apr-15 6,500 6,500 2,300 May-15 6,000 7,142 2,278 Jun-15 6,750 7,150 2,013 Jul-15 7,150 7,067 Aug-15 6,750 6,000 3,672 Sep-15 6,500 7,500 2,300 Opt-15 6,000 7,100 2,013 Nov-15 5,500 6,600 1,725 Dic-15 5,500 Jan-16 13,100 7,000 3,138 Feb-16 6,875 6,500 Mar-16 6,600 6,600 3,428 Apr-16 6,600 6,075 May-16 6,000 6,500 2,500 Jun-16 6,406 6,500 Jul-16 6,488 6,500 2,875 Aug-16 6,000 6,600 Sep-16 6,600 6,750 2,500 Opt-16 6,000 6,250 Nov-16 6,000 6,000 4,550 Dic-16 4,750 Jan-17 13,000 7,700 2,500 Feb-17 6,150 6,548 2,875 Mar-17 6,500 6,500 2,875 Apr-17 6,600 6,000 2,300 May-17 6,000 7,150 3,554 Jun-17 6,750 6,500 2,500 Jul-17 6,500 6,750 2,300 Aug-17 6,000 6,692 2,300 Sep-17 6,000 6,500 1,556 Opt-17 6,000 6,000 3,900 Nov-17 5,500 5,510 2,000 Dic-17 4,750
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GROSS ISSUES AT NOMINAL VALUE – SECURITIES EXCEEDING TWO YEARS (euro millions) BTP CCTeu BTP €i BTP Italia 5-7 10 15 30 10 15 20 30 50 4-6-8 5 year 3 year 5 year 7 year year year year year year year year year year year Jan-14 1,250 4,808 3,450 2,875 2,875 1,957 Feb-14 1,685 1,150 4,025 5,200 2,875 3,450 1,725 Mar-14 1,113 4,500 3,608 3,186 2,300 4,250 1,725 Apr-14 3,251 975 540 3,564 3,000 2,760 3,750 1,412 20,565 May-14 2,655 1,131 5,200 4,025 2,588 3,450 7,000 Jun-14 1,875 1,150 4,025 2,905 4,936 3,001 1,150 Jul-14 1,674 639 511 3,450 4,768 2,875 2,875 2,300 Aug-14 1,500 3,000 2,500 Sep-14 1,725 966 525 2,457 2,875 2,500 4,001 2,000 Oct-14 3,807 665 485 4,128 2,875 2,300 3,450 1,438 7,506 Nov-14 2,255 2,781 2,875 2,172 3,163 1,500 Dec-14 1,725 3,550 2,300 Jan-15 1,557 692 308 3,450 3,296 2,875 3,446 1,501 6,500 Feb-15 2,013 1,150 2,875 3,450 5,200 4,025 1,725 Mar-15 2,013 979 526 2,500 2,875 3,000 5,850 8,000 1,750 Apr-15 3,900 505 3,531 2,300 2,500 2,875 9,379 May-15 2,588 467 3,087 4,069 2,500 2,000 750 750 Jun-15 2,300 895 225 2,502 2,809 2,300 2,875 778 947 Jul-15 2,779 817 2,858 1,725 2,285 3,331 1,725 1,599 Aug-15 2,013 2,208 2,855 Sep-15 1,725 522 2,270 2,197 5,015 4,474 1,695 Oct-15 3,900 3,500 3,691 2,300 2,875 3,450 1,150
Nov-15 1,717 412 2,160 4,000 2,790 2,181
Dec-15 1,000 2,500 1,687
Jan-16 1,637 550 2,001 2,394 3,450 2,588 2,013 Feb-16 2,013 946 2,240 2,588 2,875 3,450 9,000 Mar-16 2,300 293 2,108 2,588 5,200 5,200 1,725 Apr-16 1,725 863 3,501 4,214 2,821 3,047 6,500 1,374 8,014 May-16 3,771 3,000 2,548 2,293 2,723 2,501 1,500 Jun-16 2,300 805 2,000 2,502 3,000 3,002 1,259 Jul-16 2,013 1,150 2,069 2,875 2,504 2,875 1,251 1,750 Aug-16 2,300 2,300 5,850 Sep-16 1847 939 2,000 3,231 4,000 3,365 1,250 Oct-16 2,300 669 4,000 4,001 2,506 2,875 2,065 5,000 5,220 Nov-16 3,250 792 414 2,750 2,750 2,250 2,500 1,312 Dec-16 3,400 2,013 1,725 Jan-17 2,013 1,105 3,001 2,500 2,750 1,725 6,000 1,500 Feb-17 2,588 828 3,163 3,163 2,875 5,200 1,516 Mar-17 2,196 3,000 2,750 5,200 3,500 2,300 1,387 Apr-17 2,661 738 512 5,850 2,251 2,875 2,500 2,400 750 May-17 4,550 984 472 2,819 2,875 2,588 3,163 1,251 8,590 Jun-17 2,013 539 2,875 3,450 3,450 3,163 6,500 Jul-17 1,725 1,438 2,838 2,875 2,695 5,047 1,471 Aug-17 1,725 4,891 2,588 Sep-17 2,013 791 709 2,501 3,450 4,001 2,875 1,500 Oct-17 1,725 1,438 5,200 2,875 2,300 2,300 1,713 Nov-17 4,550 2,002 2,875 2,729 2,875 1,577 7,107 Dec-17 2,013 2,013 Note: Not including securities placed under exchange transactions
106 MINISTRY OF ECONOMY AND FINANCE ANNEXES
GROSS ISSUES AT NOMINAL VALUE – RE-OPENING OF OFF-THE-RUN SECURITIES (euro milions)
CCT BTP€i BTP 7 year, infl. 2 – 10 year 11 - 15 year 16 – 30year 2 - 5 year 6 - 10 year 11 - 15 year 16 - 30 year Jan-14 Feb-14 Mar-14 1,187 827 Apr-14 May-14 1,150 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15
Feb-15
Mar-15
Apr-15 358 1,500
May-15 533
Jun-15
Jul-15
Aug-15
Sep-15 564
Oct-15
Nov-15 614 1,150
Dec-15
Jan-16 600
Feb-16 1,150
Mar-16 570
Apr-16 707
May-16 1,000
Jun-16 742
Jul-16
Aug-16
Sep-16 750
Oct-16 832
Nov-16 605
Dec-16 1,150
Jan-17 1,005 Feb-17 536 1,150 1,184 Mar-17 1,254 1,150 1,562 Apr-17 1,000 1,200 May-17 1,499 Jun-17 461 Jul-17 929 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Note: Not including securities placed under exchange transactions
MINISTRY OF ECONOMY AND FINANCE 107 2017 PUBLIC DEBT REPORT
COMPOUNDED GROSS YIELDS AT ISSUANCE OF GOVERNMENT BONDS (weighted monthly average) BOT CTZ CCTeu BTP€i (*) BTP BTP Italia (*) 6 12 24 5-7 5 10 15 30 3 5 7 10 15 20 30 50 4-6-8 month month month year year year year year year year year year year year year year year Jan-14 0.714 0.735 1.194 2.26 1.51 2.71 3.17 4.11 4.26 Feb-14 0.456 0.676 0.822 1.79 2.01 1.41 2.43 3.02 3.81 4.59 Mar-14 0.505 0.592 0.707 1.56 3.43 1.12 2.14 2.71 3.42 3.85 Apr-14 0.595 0.589 0.786 1.30 3.16 3.32 0.93 1.88 2.44 3.29 4.27 2.10 May-14 0.493 0.650 0.786 1.32 1.41 1.07 1.84 2.29 3.22 3.58 Jun-14 0.309 0.495 0.591 1.38 2.87 0.89 1.62 2.12 3.01 4.05 Jul-14 0.236 0.387 0.428 1.24 0.97 2.93 0.84 1.35 2.17 2.81 3.44 Aug-14 0.136 0.279 0.326 1.12 1.20 2.60 Sep-14 0.232 0.271 0.385 1.16 2.31 3.57 0.52 1.10 1.71 2.39 3.03 Oct-14 0.379 0.301 0.692 1.08 2.50 2.78 0.70 1.06 1.71 2.45 3.66 1.49 Nov-14 0.272 0.335 1.25 0.77 1.23 1.74 2.44 2.97 Dec-14 0.418 1.10 0.94 2.08 Jan-15 0.229 0.243 0.401 0.96 0.55 2.53 0.61 0.98 1.29 1.89 2.46 3.29 Feb-15 0.090 0.209 0.219 0.87 1.58 0.44 0.89 1.23 1.62 2.10 Mar-15 0.040 0.079 0.162 0.62 1.31 1.42 0.15 0.56 0.71 1.36 1.69 1.86 Apr-15 0.000 0.013 0.079 0.71 1.41 0.23 0.55 0.89 1.34 1.10 May-15 0.004 0.027 0.062 0.76 2.05 0.32 0.63 1.31 1.40 2.32 2.92 Jun-15 0.060 0.061 0.204 0.78 2.14 3.27 0.50 0.85 1.76 1.83 2.77 3.36 Jul-15 0.007 0.124 1.08 2.02 0.48 1.25 1.60 2.35 2.63 3.24 Aug-15 0.007 0.011 0.166 0.67 0.77 1.83 Sep-15 0.023 0.028 0.116 0.65 1.72 0.24 0.84 1.37 1.95 2.96 Oct-15 -0.055 0.023 -0.023 0.76 2.24 0.25 0.71 1.24 1.82 2.14 Nov-15 -0.112 -0.030 -0.095 0.59 1.91 0.11 0.53 0.98 1.48 Dec-15 -0.003 0.51 0.37 1.36 Jan-16 -0.059 -0.074 -0.113 0.42 1.35 0.02 0.57 0.99 1.59 2.03 Feb-16 -0.042 -0.032 0.47 1.95 0.11 0.42 1.05 1.44 2.76 Mar-16 -0.050 -0.068 -0.063 0.58 2.33 -0.05 0.44 0.79 1.50 1.84 Apr-16 -0.172 -0.081 0.44 1.34 0.05 0.34 0.82 1.24 2.30 2.49 1.14 May-16 -0.262 -0.140 -0.137 0.59 0.71 0.04 0.49 0.87 1.51 1.99 Jun-16 -0.150 -0.122 0.53 1.79 0.08 0.40 0.83 1.42 2.49 Jul-16 -0.185 -0.176 -0.150 0.57 0.45 -0.04 0.33 0.63 1.35 1.57 1.88 Aug-16 -0.236 -0.190 0.38 0.26 1.24 Sep-16 -0.257 -0.175 -0.216 0.32 1.50 -0.02 0.19 0.69 1.14 1.91 Oct-16 -0.295 -0.238 0.33 1.08 0.03 0.28 0.83 1.21 1.77 2.85 1.13 Nov-16 -0.199 -0.217 -0.283 0.59 1.12 3.09 0.30 0.57 1.37 1.60 3.14 Dec-16 -0.196 0.99 0.91 1.97 Jan-17 -0.301 -0.250 -0.071 0.58 2.52 0.06 0.54 1.15 1.77 2.53 2.53 Feb-17 -0.294 -0.247 0.029 0.73 1.14 0.25 0.92 1.59 2.37 3.43 Mar-17 -0.294 -0.226 -0.085 0.79 2.50 0.37 1.11 1.90 2.28 2.87 Apr-17 -0.326 -0.239 -0.075 0.70 0.93 2.45 0.47 1.04 1.69 2.25 2.84 3.44
108 MINISTRY OF ECONOMY AND FINANCE ANNEXES
May-17 -0.358 -0.304 -0.078 0.93 2.23 3.08 0.37 1.04 1.65 2.29 3.32 1.16 Jun-17 -0.372 -0.351 -0.167 0.92 0.64 0.15 0.88 1.35 2.15 3.54 Jul-17 -0.362 -0.352 -0.160 0.83 2.26 0.23 0.81 1.57 2.16 2.77 Aug-17 -0.356 -0.337 -0.139 0.77 0.88 2.16 Sep-17 -0.382 -0.326 -0.220 0.81 0.69 2.52 0.05 0.84 1.52 2.09 2.74 Oct-17 -0.400 -0.334 -0.167 0.75 2.14 0.15 0.83 1.53 2.19 3.33 Nov-17 -0.436 -0.395 -0.337 0.60 -0.02 0.58 1.21 1.86 2.38 0.93 Dec-17 -0.407 0.46 1.73 Note: Not including securities placed under exchange transactions (*) Gross yield including inflation expectation at the issuance time
MINISTRY OF ECONOMY AND FINANCE 109 2017 PUBLIC DEBT REPORT
WEIGHTED AVERAGE RESIDUAL LIFE OF GOVERNMENT BONDS (months) BTP BOT CCT CCTeu CTZ Foreign (*) TOTAL (*) nominal linkers Italia Jan-14 4.96 17.85 41.64 12.14 91.36 102.29 37.64 127.41 76.52 Feb-14 5.14 16.93 41.27 11.66 90.62 100.97 36.71 126.39 75.99 Mar-14 5.11 20.87 40.64 11.05 89.72 100.78 35.69 125.03 75.84 Apr-14 5.16 19.88 40.87 10.69 90.05 100.16 43.49 124.66 75.78 May-14 5.03 18.90 40.77 12.19 89.57 98.76 42.47 123.72 75.81 Jun-14 5.01 17.91 40.58 11.64 90.26 97.97 41.49 122.75 75.95 Jul-14 4.89 16.89 40.08 10.98 90.27 96.92 40.47 124.13 75.72 Aug-14 4.92 15.88 39.51 10.53 91.33 95.90 39.46 123.23 75.95 Set-14 5.10 14.89 39.02 12.25 90.41 109.69 38.47 122.12 76.63 Oct-14 5.18 13.87 39.72 11.69 89.62 108.86 40.18 122.16 76.07 Nov-14 5.11 12.88 39.63 10.70 89.71 107.87 39.20 121.64 75.93 Dec-14 4.92 16.84 39.26 12.44 88.83 106.85 38.18 121.95 76.62 Jan-15 5.08 15.82 38.80 12.07 89.31 106.05 37.16 132.28 76.63 Feb-15 5.21 14.90 38.59 11.95 89.92 105.44 36.24 133.64 76.85 Mar-15 5.17 13.88 38.24 11.36 90.92 104.62 35.22 136.56 77.44 Apr-15 5.13 12.90 39.24 10.78 91.28 103.59 39.79 136.62 77.53 May-15 5.06 11.88 39.43 10.13 90.29 102.68 38.78 136.06 76.74 Jun-15 5.09 10.89 39.47 12.22 90.70 102.18 37.80 138.20 77.47 Jul-15 5.06 9.87 39.70 11.21 91.42 101.37 36.79 137.19 77.73 Aug-15 5.01 8.85 39.50 11.06 92.20 100.35 35.77 136.18 77.82 Set-15 5.14 12.00 39.70 10.56 91.55 99.27 34.78 135.08 77.71 Oct-15 5.16 10.98 40.31 9.95 90.47 100.81 33.74 134.05 77.07 Nov-15 5.11 9.99 40.01 9.28 90.77 100.08 32.75 133.05 76.98 Dec-15 4.93 8.97 45.37 10.91 90.80 99.06 31.73 132.10 78.22 Jan-16 5.07 7.95 44.97 10.44 89.92 98.20 30.71 135.32 77.21 Feb-16 5.17 7.00 44.74 9.48 90.84 97.90 29.76 133.60 77.91 Mar-16 5.15 5.98 44.63 9.42 90.07 97.45 30.92 132.41 77.47 Apr-16 5.11 5.00 44.22 10.89 91.16 96.49 34.96 131.45 78.60 May-16 5.06 3.98 44.75 10.54 91.45 95.11 33.94 133.80 78.65 Jun-16 5.09 2.99 44.64 9.57 90.84 94.66 33.52 133.38 78.30 Jul-16 5.10 7.00 44.32 9.24 90.00 93.46 32.51 140.33 78.17 Aug-16 5.07 5.98 44.08 11.61 90.88 92.44 31.50 139.34 79.00 Set-16 5.15 5.00 43.73 11.13 91.40 98.36 30.51 145.94 79.66 Oct-16 5.14 3.98 43.43 10.11 92.28 97.46 39.29 144.50 81.07 Nov-16 5.13 2.99 43.69 11.04 92.57 96.92 38.30 145.71 81.06 Dec-16 4.92 1.97 43.64 10.02 92.63 95.90 37.28 144.82 81.06 Jan-17 5.08 0.95 43.27 9.82 92.10 95.57 36.29 144.29 80.27 Feb-17 5.16 0.03 43.17 13.05 93.18 94.55 35.36 143.43 81.17 Mar-17 5.17 - 43.05 12.73 92.60 94.37 34.35 143.60 80.95 Apr-17 5.14 - 42.83 12.23 91.91 93.53 41.14 142.74 81.00 May-17 5.16 - 43.31 12.28 93.09 93.42 43.51 142.48 81.47 Jun-17 5.18 - 45.98 11.95 94.34 92.37 44.58 147.28 82.69 Jul-17 5.19 - 45.60 11.47 93.63 91.70 43.56 146.32 82.02 Aug-17 5.17 - 45.09 14.60 94.08 90.68 42.54 145.33 82.46 Set-17 5.20 - 44.68 13.87 93.07 99.87 41.55 145.06 82.30 Oct-17 5.16 - 48.84 13.87 92.26 99.12 40.51 144.33 82.10 Nov-17 5.08 - 49.58 13.36 92.72 98.28 53.92 143.50 83.04 Dec-17 4.86 - 49.66 12.34 92.16 97.26 52.90 142.59 82.81 Note: Not including securities placed under exchange transactions
110 MINISTRY OF ECONOMY AND FINANCE ANNEXES
COMPOUNDED GROSS YIELDS AT ISSUANCE OF GOVERNMENT BONDS – RE-OPENING OF OFF-THE-RUN SECURITIES (weighted monthly average) CCT BTP€i(*) BTP 7 years, infl. 2 – 10 year 11 – 15 year 16 - 30 2 - 5 year 6 - 10 11 - 15 year 16 - 30 year year year Jan-14 Feb-14 Mar-14 1.43 4.01 Apr-14 May-14 3.71 Jun-14 Jul-14 Aug-14 Set-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 0.94 1.64 May-15 1.66 Jun-15 Jul-15 Aug-15 Set-15 1.08 Oct-15 Nov-15 1.06 2.67 Dec-15 Jan-16 1.54 Feb-16 2.08 Mar-16 1.27 Apr-16 1.71 May-16 1.90 Jun-16 2.44 Jul-16 Aug-16 Set-16 2.28 Oct-16 1.34 Nov-16 3.05 Dec-16 0.67 Jan-17 1.71 Feb-17 2.20 0.37 3.31 Mar-17 0.53 2.05 3.42 Apr-17 0.40 2.53 May-17 3.38 Jun-17 1.72 Jul-17 2.93 Aug-17 Set-17 Oct-17 Nov-17 Dec-17 Note: Not including securities placed under exchange transactions (*) Gross yield including inflation expectation at the issuance time
MINISTRY OF ECONOMY AND FINANCE 111 2017 PUBLIC DEBT REPORT
BOT: COMPOUNDED GROSS YIELDS AT ISSUANCE 0.0%
-0.1%
-0.2%
-0.3%
-0.4%
-0.5% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 2017 6 month 12 month
CTZ: COMPOUNDED GROSS YIELDS AT ISSUANCE 0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% -0.4% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 2017
BTP: COMPOUNDED GROSS YIELDS AT ISSUANCE 4.0%
3.0%
2.0%
1.0%
0.0%
-1.0% Jan FebMar AprMayJun Jul AugSep OctNovDec Jan FebMar AprMayJun Jul AugSep OctNovDec 2016 2017 3 year 5 year 7 year 10 year 15 year 20 year 30 year 50 year
112 MINISTRY OF ECONOMY AND FINANCE ANNEXES
BTP ITALIA AND BTP€i – EXPECTED YIELD 4.0%
3.0%
2.0%
1.0%
0.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 2017 4 year 5 year 10 year 15 year 30 year
CCTeu: COMPOUNDED GROSS YIELD AT ISSUANCE 1.0%
0.8%
0.6%
0.4%
0.2%
0.0% Jan FebMar AprMayJun Jul Aug Sep OctNovDec Jan FebMar AprMayJun Jul Aug Sep OctNovDec 2016 2017
MINISTRY OF ECONOMY AND FINANCE 113 2017 PUBLIC DEBT REPORT
EURO AREA 10-YEAR BENCHMARK SPREADS OVER BUND (basis points) 500 FRANCE SPAIN BELGIUM ITALY IRELAND PORTUGAL
400
300
200
100
0
ASSET SWAP SPREAD (basis points) 250 Spread BTP 3 year Spread BTP 10 year Spread BTP 30 year 200
150
100
50
0
-50
Jul-17
Apr-17
Jan-17 Jan-17
Oct-17
Jun-17
Sep-17
Mar-17
Feb-17
Aug-17
Dec-17 Dec-17
Nov-17 May-17
114 MINISTRY OF ECONOMY AND FINANCE ANNEXES
MONTHLY TREND OF WEIGHTED AVERAGE RESIDUAL LIFE OF GOVERNMENT BONDS (months) 84 2014 2015 2016 2017
82
80
78
76
74
Jul-14 Jul-15 Jul-16 Jul-17
Jan-14 Jan-15 Jan-16 Jan-17
Sep-16 Sep-14 Sep-15 Sep-17
Mar-14 Mar-15 Mar-16 Mar-17
Nov-14 Nov-15 Nov-16 Nov-17
May-14 May-15 May-16 May-17
MINISTRY OF ECONOMY AND FINANCE 115