Italy Falls Short of Bond-Sale Target as Borrowing Costs Rise at Auction

Italy’s borrowing costs rose to a euro-era record at a sale of three-year bonds, driving yields higher on concern that efforts to contain the sovereign crisis won’t be enough to safeguard the region’s third-largest economy.

The Rome-based Treasury sold 3.08 billion euros ($4.36 billion) of 2014 bonds to yield 4.93 percent, the highest since November 2000, and up from 4.68 percent on Sept. 29. Italy’s bonds extended declines after the sale, while German bunds pared most of their earlier losses.

“They’ve sold the bulk of what they wanted to sell, but these are very high levels of interest that they are having to pay,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.

The auction was the first test of investor enthusiasm for Europe’s conventional bonds since the all-night summit reached a deal to boost the euro-area rescue fund, recapitalize banks and apply a 50 percent reduction in how much Greece will repay bondholders. European leaders also urged Italy to push through the plan presented by Berlusconi to speed up growth and reduce the region’s second-biggest debt load after Greece.

Below Target

Italy sold a total of 7.93 billion euros of bonds, less than the maximum 8.5 billion-euro target, after Prime Minister Silvio Berlusconi vowed in a letter to the European Commission this week to boost growth and cut debt to fight the sovereign crisis. Also auctioned were 2.98 billion euros of 2022 bonds to yield 6.06 percent, 871 million euros of 2019 bonds to yield 5.81 percent and 1 billion euros of floating-rate bonds due 2017 to yield 5.59 percent.

“All in all, today’s auction was not very satisfying,” said Annalisa Piazza, a fixed-income strategist at Newedge Group in London. Although the European Union summit that ended yesterday in Brussels “welcomed the new measures the government is planning to implement in the next eight months to ‘change’ the Italian economy, markets remain skeptical about the outcome.”

The premium investors demand to hold Italy’s 10-year bond instead of German bunds rose to 376 basis points as of 12:33 p.m. in Rome, up from 368 basis points before the sale, and 10 basis points higher than yesterday. The bond’s yield was 5.97 percent, compared with 5.87 percent yesterday. The European Central Bank started buying Italian debt on Aug. 8 to tame borrowing costs after the 10-year yield surged to a euro-era high of 6.4 percent.

Bund Reaction

German 10-year bonds, the region’s benchmark, erased their drop, paring a weekly loss. The German 10-year yield was little changed at 2.21 percent at 11:19 a.m. in London, after rising earlier to 2.28 percent. The two-year yield was at 0.65 percent.

EU leaders agreed to boost the firepower of the region’s rescue fund, in an effort to stop contagion from engulfing Italy, which has a debt of 1.9 trillion euros, more than Spain, Greece, Portugal and Ireland combined. Italy has almost 200 billion euros of bonds maturing in 2012.

Italy’s bond yields remain at “very high levels,” which could be reduced through prompt implementation of the changes announced by the government, Bank of Italy Governor and incoming ECB President Mario Draghi said in a speech in Rome this week.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.

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Oct. 28 (Bloomberg) -- Chiara Manenti, fixed-income strategist at Intesa Sanpaolo SpA, discusses Italy's sale of 7.93 billion euros ($11.24 billion) of bonds, less than the maximum target for the auction. Manenti speaks from Milan with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)