3 March, 2020Page 1 MTS

Bond Market Outlook

By Maria Cannata

BMCG meeting of March 4, 2020

3 March, 2020Page 2 MTS

A look at the recent past

3 March, 2020Page 3 MTSPage 3 MTS

Primary markets

• Large issuance of sovereign bonds since the beginning of 2020

• In particular, very relevant demand and supply of long dated bonds

• A look at the inflation linkers sector

• Secondary markets

• General recovery on volumes traded, after a modest Q4 2019

• Yields declining and spreads vs Bund generally reducing until February 21st,

afterwards increasing tensions due to the COVID 19 contagion

• A look at bid-ask spreads

Main Evolution since 2019-end

3 March, 2020Page 4 MTSPage 4 MTS

Sovereign Primary Market / 1

Bond issuances 2020 YTD grouped by type and maturity (€bn)Country

2 - 3y 5y 7y 10y15 -

20y30y ILB

CCTeu -

FRNICTZ TOTAL

Redemptions Net issuance

Italy 5,7 7,8 5,5 10,2 10,3 7 2,9 4,6 6,9 60,9 22,7 30,7

France 7,7 7,1 6,2 12,4 6 8,5 4 0,0 0,0 52,0 0 52

Spain 7,2 6,8 1,4 13,7 1,2 6,1 1,5 0,0 0,0 38,0 23,1 14,9

Germany 9,0 8,0 0,0 9,0 0,0 3,0 1,0 0,0 0,0 30,0 22,0 8,0

Belgium 0,0 0,0 0,0 6,0 5,0 0,4 0,0 0,0 0,0 11,4 0,0 11,4

Portugal 0,0 0,0 0,7 4,0 0,8 0,0 0,0 0,0 0,0 5,5 0,0 5,5

Ireland 0,0 0,0 0,0 0,0 4,0 0,0 0,0 0,0 0,0 4,0 0,5 3,5

Austria 1,3 0,6 0,3 3,7 0,0 0,1 0,0 0,0 0,0 6,0 0,0 6,0

Finland 0,0 0,0 0,0 0,0 3,0 0,0 0,0 0,0 0,0 3,0 0,0 3,0

Netherlands 0,0 0,0 1,3 0,0 1,4 0,0 0,0 0,0 0,0 2,7 15,0 -12,3

Greece 0,0 0,0 0,0 0,0 2,5 0,0 0,0 0,0 0,0 2,5 0,0 2,5

Slovenia 0,0 0,0 0,0 1,5 0,0 0,0 0,0 0,0 0,0 1,5 1,6 -0,1

Slovakia 0,0 0,0 0,2 0,3 0,1 0,0 0,0 0,0 0,0 0,6 0,0 0,6

TOTAL by

type and

maturity30,9 27,8 15,6 56,8 34,3 25,1 9,4 3,6 6,9

An overall picture since the start of the year

3 March, 2020Page 5 MTSPage 5 MTS

Sovereign Primary Market / 2

Main remarks

• As usual, the largest amount issued was on

the 10-year, followed by longer tenors.

• Extremely low yields pushed investors to

extend duration, producing strong demand in

long maturities.

• Many syndicated issuances in the long end,

with high record order-books.

• Inflation linkers still attractive, with good

demand in auction, confirming the trend

observed at the 2019-end, where, for

instance, Italy placed 4 €bn of a new 10y

BTP€i and 6.75 €bn of a 8y BTP Italia. Indeed,

the ILB less liquidity produces a yield pick-up

of 20-25 bps, which enlarge the traditional

investor base of such market segment.

CountryDate of

issuance

Volume

(€mln)

Tenor at

issuance

Slovenia 7 Jan 2020 1.500 10 years

Ireland 8 Jan 2020 4.000 15,3 years

Portugal 8 Jan 2020 4.000 10,8 years

Germany 8 Jan 2020 9.000 10,1 years

Spain 14 Jan 2020 12.060 10,3 years

Italy 15 Jan 2020 7.000 30,6 years

Belgium 15 Jan 2020 6.000 10,4 years

France 28 Jan 2020 5.000 32,3 years

Greece 28 Jan 2020 2.500 15 years

Austria 29 Jan 2020 3.250 10,1 years

Finland 4 Feb 2020 3.000 16,2 years

Italy 11 Feb 2020 9.000 16,1 years

Belgium 18 Feb 2020 5.000 20,2 years

Spain 25 Feb 2020 5.000 30,7 years

Syndicated issuances

3 March, 2020Page 6 MTSPage 6 MTS

Yields on secondary market: short end

-0,9

-0,8

-0,7

-0,6

-0,5

-0,4

-0,3

-0,2

-0,1

0

0,1

0,2

21

/11/2

01

9

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Secondary market 2y-bond yields

Germany Italy Spain France Portugal

%

All 2y-bond yields in negative territory, even Italy since mid-December. Strong reduction for the

Italian bond since the beginning of the year. New divergence between core and peripheral

countries during the last week of February.

3 March, 2020Page 7 MTSPage 7 MTS

Yields on secondary market: medium term

-1

-0,8

-0,6

-0,4

-0,2

0

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0,6

0,8

1

26/1

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Secondary market 5y-bond yields

Germany Italy Spain France Portugal

Similar trend for 5-y tenor, in general with higher yields, with the only exception of the German

bond, showing an extremely low level.

3 March, 2020Page 8 MTSPage 8 MTS

Yields on secondary market: 10 year benchmarks

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

21

/11/2

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Germany Italy Spain France Portugal

Secondary market 10y-bond yields

%

10y-benchmark yields at record lows, due to concerns regarding global growth. During the past

week, this trend was accentuating for Germany, while partially reversing for Italy, as

consequence of COVID-19 contagion.

3 March, 2020Page 9 MTSPage 9 MTS

Yields on secondary market: a look to spreads vs 10y Bund

0

0,2

0,4

0,6

0,8

1

1,2

1,4

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1,8

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Italy - Germany Spain - Germany France - Germany Portugal - Germany

10-year sovereign bonds: spreads vs Bund

%

Evolution of spreads vs Bund emphasises the fly to quality effects generated by fears regarding

the COVID-19 impact on the economic growth.

3 March, 2020Page 10 MTSPage 10 MTS

Yields on secondary market: long term benchmarks

-0,3

0

0,3

0,6

0,9

1,2

1,5

1,8

2,1

2,4

2,7

Secondary market 30y-bond yieldsGermany Italy Spain France

On the 30-y tenor, evident impact of the large demand for long dated bonds, seeking

investors a yield pick-up. Impressive decline in negative territory of 30-y Bund at

February-end.

3 March, 2020Page 11 MTSPage 11 MTS

Quite stable bid-offer spreads

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

21

-no

v-1

9

23

-no

v-1

9

25

-no

v-1

9

27

-no

v-1

9

29

-no

v-1

9

01

-dic

-19

03

-dic

-19

05

-dic

-19

07

-dic

-19

09

-dic

-19

11

-dic

-19

13

-dic

-19

15

-dic

-19

17

-dic

-19

19

-dic

-19

21

-dic

-19

23

-dic

-19

25

-dic

-19

27

-dic

-19

29

-dic

-19

31

-dic

-19

02

-gen

-20

04

-gen

-20

06

-gen

-20

08

-gen

-20

10

-gen

-20

12

-gen

-20

14

-gen

-20

16

-gen

-20

18

-gen

-20

20

-gen

-20

22

-gen

-20

24

-gen

-20

26

-gen

-20

28

-gen

-20

30

-gen

-20

01

-feb

-20

03

-feb

-20

05

-feb

-20

07

-feb

-20

09

-feb

-20

11

-feb

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13

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-20

15

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17

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19

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-20

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-feb

-20

25

-feb

-20

27

-feb

-20

10 Yrs Italian Benchmark 10 Yrs Spanish Benchmark 10 Yrs French Benchmark 10 Yrs German Benchmark

Bid-offer spreads on MTS cash market (price cents)

Significant widening only in the past week, particularly evident only in the Spanish market.

3 March, 2020Page 12 MTSPage 12 MTS

Volatility Jump for COVID-19

VIX Index at record levels

3 March, 2020Page 13 MTSPage 13 MTS

COVID-19 depresses equity markets

Unexpected severity of the contagion risks to compromise global growth, worsening

dramatically market perspectives.

3 March, 2020Page 14 MTS

Prospects for the near future

of the bond market

3 March, 2020Page 15 MTSPage 15 MTS

Primary markets

• Having sovereign issuers profited of the good market moment, 33% of the 2020

bond issuance programme is completed.

• In SSA field, the issuance of green or sustainable bonds was very relevant in the

past 3 months: only in euro, 14.16 billion, of which 7.45 by European entities, and

the remaining from various other regions in the world. Several other issuances in

different currencies (USD, Yen, GBP, CAD, AUD).

• Considering the very strong demand for these assets, it is reasonable to expect

that trend continue.

• There at least three big Euro sovereigns that are seriously considering to enter in

this market: Germany, Italy and Spain. The most like timing is the third quarter of

the year for Germany (but an acceleration is not excluded) while for the other two

may be also Q4.

Expectations of new issuances

3 March, 2020Page 16 MTSPage 16 MTS

Level of rates

• Concerns regarding economic growth are making difficult envisaging material

changes in the monetary policy. If someone, only measures contrasting risks of

recession consequent to COVID-19 seem reasonable

• Government bonds have been placed at record low yields. Even countries like Italy,

where political tensions are often playing against, the average cost of funding has

touched the historical minimum. Nevertheless, some increase is possible, as far as a

widening of spreads vs Germany by peripheral countries.

Liquidity of the secondary market

• The liquidity could be impacted by tensions caused by the uncertainty on global

economy, that makes less important other idiosyncratic risks.

Yields perspectives

3 March, 2020Page 17 MTSPage 17 MTS

Possible factors impacting market

Global Environment

• COVID-19 effects on the economic growth seem to be the most relevant at the

moment

• Tensions in Middle Est and North Africa

• Actual consequences of the tariff war

Political Risks

• Outside Europe, possible aggressive tones in the USA electoral campaign

• Local elections in Italy

3 March, 2020Page 18 MTS

Thank you!