July 18, 2018 / 8:24 AM / in 2 months

UPDATE 2-LCH raises margin call on Italian bonds

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MILAN, July 18 (Reuters) - The cost of using Italian bonds to raise funds rose on Wednesday after clearing house LCH increased the margin on debt from the euro zone’s third largest economy to reflect higher volatility.

Italian bonds have faced pressure since anti-establishment parties joined forces in May and formed a coalition government following an inconclusive March election.

Investors have demanded a bigger premium on the Italy’s debt due to concerns that public finances may weaken under the new coalition and that previous market-friendly reforms may be unwound.

Banks use government bonds as collateral to access cash in the repurchase (repo) market, in which clearing houses assume lending risks to provide institutions with the cash.

Clearing houses, such as LCH, collect cash in the form of a margin on individual trades, which they hold centrally to refund members left out of pocket in the event of a default.

LCH said in a note on its website that the margin increase would be effective after the close of business on Wednesday and would apply to the margin calls on Thursday.

The rise affects maturities between three months and 10-years, as well as floating-rate CCT bonds.

The worst hit are maturities between two and 4.75 years as well as CCT bonds, which are mostly held by domestic investors and traditionally more stable than nominal BTP bonds.

“The parameter that LCH monitors more closely is volatility, so given what happened in recent months I’m not surprised it raised margins on BTP bonds and CCTs,” said Luca Cazzulani, deputy head of fixed-income strategy at UniCredit.

“The changes come now that the market has stabilised but it must be said that any changes during the phase of volatility would have had a bigger impact.”

LCH took similar steps on Italian debt in 2011 and 2012 during the euro zone sovereign crisis. Italy’s 10-year debt costs were close to 7 percent in 2011 compared with 2.5 percent now.

LCH’s announcement piled pressure on shorter-dated Italian government bonds on Wednesday, traders said. Two-year yields rose 6 basis points to the day’s high of 0.63 percent after the LCH notice, before easing back to 0.58 percent.

The move follows a rally which pushed Italy’s benchmark 10-year yields to a seven-week low in the previous session. (Reporting by Elvira Pollina, Valentina Za and Luca Trogni in Milan and Abhinav Ramnarayan in London Editing by Alison Williams and Edmund Blair)

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