The Daily Update - A boot that doesn't fit our investment model

1st March 2067 is the distant maturity of the latest €5bn bond issuance from Italy. Even in the wake of European immediate concerns, talk of the ECB reducing QE and Italian banks fears not to mention the Deutsche Bank furore - subscriptions for this first ever 50 year bond from ‘Il Bel Paese’ were 3.7x oversubscribed. €18.5bn of investor money was keen (or at least reluctantly persuaded) to bet on Italy’s ultra-long-term creditworthiness at underwhelming spread of 52 basis points over Bunds. Not us.

Italy is following in the footsteps of Spain and Belgium who also debuted 50 year bonds this year along with France’s 50 year issuance, but these were all just €3bn is size. None of these seemed particularly attractive investments and yesterday’s bond is perhaps the least so. EU officials remain concerned that the Italian banking sector’s vertiginous bad loans, of around €360bn, are one of the most pronounced tripping hazard on the EU’s path to recovery. The strict EU banking bailout rules and unsustainable €2.2tn ($2.5tn) of Italian public debt – which is equivalent to more than 140% of GDP – only add to the chances of an EU crisis originating from the boot of Europe.

When one can invest in Aa1 rated bonds from Apple with a duration 10 years shorter (16 vs 26) and a yield 1% higher (3.8% vs 2.8%) the only boots we’d consider buying in this environment and at these rates are made from leather and available on Bond Street not in the bond market. Maybe if more people did this Italy would have a better economic outlook…and everyone would look better off.