Global Daily – Who owns Italian bonds?

by: Nick Kounis

Euro Rates: Private investors have been reducing Italian bond holdings – The Italian government bond market is very much back in the spotlight. A spend-thrift populist government seems close to taking shape. Italian government bonds have underperformed their counterparts. Against this background, we look at trends in Italian government bond holdings over recent quarters using the IMF’s Sovereign Investor Base Dataset for Advanced Economies, supplemented by ECB data, and own estimates until the end of last year.

To start off big picture, since the beginning of 2015, when the ECB launched its large-scale asset purchase programme, foreign ownership has fallen. At the end of last year, foreigners’ share in total debt stood at 32.5% (down from 35.3% in 2015Q1). In actual fact, foreign ownership would have fallen even more, had it not been for sharply increased holdings by the official sectors. Foreign official institutions (mainly central banks), saw their holdings (as a percent of total Italian debt) more than double during the QE period. It could be that foreign official institutions have been encouraged to build up their holdings of higher-yielding eurozone debt because of the ECB’s public sector bond purchase programme (PSPP). Indeed, there has been a similar pattern in Spain. The trends in official holdings mean that private foreign ownership of Italian debt has fallen sharply and is actually at the lowest level since the series began in 2004.

The fall in foreign ownership has of course been mirrored by a rise in domestic ownership, which has been driven entirely by the ECB’s PSPP. Italy’s central bank’s holdings have risen to 16.3% at the end of last year, from around 5% at the start of the programme. At the same time, private domestic ownership – both in the case of banks and non-bank institutions – has fallen significantly.

So overall, both foreign and domestic official ownership has risen, while private ownership – again both domestic and foreign – has slumped. These trends can be interpreted as a bad omen for the Italian bond market on the surface. However, we would take a ‘glass is half-full’ approach. The official sector looks to have squeezed out the private sector, and low private sector holdings suggest that investors were positioned relatively cautiously before the recent sell-off, meaning there might be less fuel than otherwise might have been the case on the back of the bond unfriendly news. In addition, the official sector is unlikely to take flight. Certainly, with regards the ECB programme, we know that net asset purchases will continue at least until September, while re-investments will likely continue long after that. So official sector holdings should continue to be a stabilising factor for the Italian bond market. As noted in yesterday’s Daily, we do expect Italian spreads to rise further, but at the same time we are not expecting a real blow-out.

Although most types of private investors appear to be positioned conservatively, there is one exception. Domestic bank holdings of domestic government securities remain at elevated levels. Although they have dropped over the last year, Italian bank holdings of domestic government bonds stood at 10.7% of their assets in March of this year according to ECB data. This is similar to the ratios in Spain and Portugal (9.6% and 12.2%, respectively), but well above core countries (generally below 5%). So domestic banks might still be inclined to reduce their exposure to own-country debt. (Nick Kounis)