Analysis-High yields and savings to boost ordinary Italians' bond purchases

MILAN (Reuters) - Enticing returns on government bonds and the fear of inflation should lure more Italian retail investors to the fixed income market in 2023, offering some help to the Treasury as the European Central Bank withdraws support.

Next year is set to be challenging for highly indebted Italy, as the ECB will offload sovereign debt from its portfolio at a rate of 15 billion euros a month between March and June.

Rome's medium and long-term gross funding needs are seen at 310-320 billion euros, against 278 billion euros ($295 billion)in 2022, the Treasury said on Wednesday.

To strengthen its relationship with small savers, the ministry said it may introduce new targeted debt instruments. In 2022 it placed over 21 billion euros of two inflation-linked BTP Italia bonds, 75% of which were bought by retail accounts.

Higher yields represent a "key factor" for retail investors, said Luca Mezzomo, head of macroeconomic analysis at Intesa Sanpaolo's Research Department.

As the Italian 10-year bond yield is set to stay over 4% at least in the short term, analysts say, small savers can be expected to buy more BTPs, though not enough to replace the enormous firepower of the ECB.

"Retail investors could have a bigger role compared with 2022," said Luca Cazzulani, Head of Strategic Research at UniCredit.

At the same time, Italians wary after successive market slumps have been parking more money in their bank accounts, a trend exacerbated by the COVID-19 pandemic, when restrictions on economic activity and movement crimped consumer spending.

In the second quarter of 2022 Italian households' bank deposits stood at 30.6% of their total financial assets, compared with a historical average of 22.8%.

"It's a record high since the start of monetary union," Mezzomo said, adding that this pile of liquidity could be shifted, at least partially, towards Italian debt.

ECB VACUUM

According to UniCredit, this year the ECB bought around 40-45 billion euros in Italian assets.

By contrast, Cazzulani forecasts 15-25 billion euros of net sales in 2023, depending on how Frankfurt calibrates its quantitative tightening approach among euro zone countries.

Filippo Mormando, strategist at BBVA, forecasts for 2023 a 190-billion-euro fall in the ECB's asset purchase programme reinvestments for the whole euro zone, about 25 billion of which will be accounted for by BTPs.

The current economic situation of double-digit inflation and high bond yields has echoes of the 1980s, when Italian families' favourite investments were Treasury bills (BOTs), which carried a return of around 20%.

Rome hopes that a new wave of retail investors can take up at least some of the slack from the ECB, although it will be hard to replicate the same scenario.

"It's impossible to go back in time," said Intesa Sanpaolo's Mezzomo, pointing out that asset management has developed enormously since the 1980s, creating a more diverse and complex market.

Nonetheless, Italian economy minister Giancarlo Giorgetti said this month new tools could be developed to increase the role of Italian savers in the placement of sovereign bonds.

BBVA's Mormando cautioned that while BTP's are now undeniably a "good investment opportunity," for ordinary Italians, a widely expected recession may induce some of them to keep their money in their bank accounts, adopting a totally "risk-off" mentality.

The Italian Treasury has forecast that gross domestic product will contract both in the current quarter and in the first quarter of next year.

($1 = 0.9429 euros)

(editing by Gavin Jones and Keith Weir)

By Sara Rossi, Alessia Pe and Valentina Consiglio