Italy Sells All Bills Offered With Yield Below Yesterday’s Euro-Era Record

Italy sold 5 billion euros ($6.8 billion) of one-year bills, the maximum for the auction, and demand rose as the Treasury lured investors with the highest yield in 14 years after debt-crisis contagion sent borrowing costs to records.

The Rome-based Treasury sold the bills to yield 6.087 percent, the highest since September 1997 and up from 3.57 percent at the last auction on Oct. 11. Demand was 1.99 times the amount on offer, compared with 1.88 times last month. The yield on Italy’s benchmark 10-year bond fell below 7 percent after the auction from a euro-era record 7.45 percent.

“Demand was good, with 2 times on the bid-to-cover,” Annalisa Piazza, a fixed-income strategist at broker Newedge Group in London. “Domestic retailers have probably supported demand.”

Italy’s borrowing costs surged yesterday after Prime Minister Silvio Berlusconi offered to resign and LCH Clearnet SA demanded more collateral on the country’s debt. The yield on the nation’s 10-year bond yield remained above the 7 percent level that led Greece, Portugal and Ireland to seek bailouts.

The yield on the benchmark bond fell after the auction, declining 25 basis points to 6.98 percent at 12:48 p.m. in Rome. That pushed the difference with German bonds to 5.23 percentage points, down from 5.53 percentage points yesterday. Italy’s next market test comes at a Nov. 14 auction of five-year bonds.

Still ‘Solvent’

“A prolonged period of 10-year bond yields in excess of 7 percent alongside a faltering economy is a dangerous mix, and could send Italy’s debt dynamics toward an unsustainable and ultimately insolvent position,” Raj Badiani, an economist at Global Insight Inc. in London, said in a research note. Still, “Italy remains solvent’” and “can survive several quarters of expensive debt auctions.”

Italy probably has cash reserves of about 35 billion euros, according to Gianluca Ziglio, a London-based interest-rate strategist at UBS AG, a cushion that may allow the Treasury to skip auctions later in the year.

Italy can’t afford to stay out of markets for long. Its debt of 1.9 trillion euros is bigger than that of Greece, Spain, Portugal and Ireland combined. The country faces about 200 billion euros in bond maturities in 2012 and another 108 billion euros of bills. The first bond redemption comes on Feb. 1, when Italy must pay back 26 billion euros for debt sold 10 years ago.

‘Buyer Strike’

“The major risk for Italy is not necessarily escalating bond yields, but rather a ‘buyer strike’ at a debt auction,” said Thomas Costerg, an economist at Standard Chartered Bank in London. That would signal “the loss of confidence is such that Italy is unable to raise finance” and “rollover its debt,”

The jump in Italian yields is boosting financing costs, which the government estimated in September would be 76.6 billion euros this year, or 4.8 percent of gross domestic product. Prior to yesterday’s surge, rising yields had added another 0.3 percent of GDP to the price tag, according to an estimate by Mizuho International Plc.

At current borrowing costs, Italy will face 28 billion euros in additional interest payments over the next three years, wiping out about half its projected budget savings through 2014, according to estimates on Nov. 8 by Open Europe, a policy institute based in Brussels and London.

To contact the reporter on this story: Chiara Vasarri in Rome at Cvasarri@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net

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