Italy-Spain Borrowing Costs Decline at Auction Following Moody’s Downgrade
Italian and Spanish borrowing costs plunged to the lowest in at least 11 months at debt sales today as investors ignored downgrades by Moody’s Investors Service.
Italy sold 6 billion euros ($7.9 billion) of bonds, meeting its target as its three-year borrowing costs fell to 3.41 percent, the lowest since March. Spain sold 12-month bills at an average rate of 1.899 percent, the least since October 2010, according to data compiled by Bloomberg. Belgium, Greece and the Netherlands also sold debt, as total euro region issuance today amounted to 20 billion euros.
“The idea of Moody’s downgrading the country was really not a factor that went against it because it probably was already priced in,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in an e-mail about the Italian sale.
Italy and Spain were both cut to A3 by Moody’s, which cited uncertainty over the euro region’s ability to deal with the sovereign debt crisis even as it said new governments in both countries were taking steps to overhaul their finances. Demand for government debt is being underpinned by three-year loans made in December by the European Central Bank, which will offer a second round of the financing, known as LTRO, at the end of this month.
“Moody’s two-notch downgrade of Spain is more background noise than anything else,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London said in an e-mailed comment. “There’s nothing new here and it is unlikely to disturb the post-LTRO landscape.”
The yield on Spain’s benchmark 10-year bond was unchanged after the auction at 5.285 percent. The spread over German bunds of the same maturity was 334 basis points, compared with 333 basis points yesterday. Italian 10-year bonds yielded 365 basis points more than bunds, compared with 367 basis points yesterday.
Under the terms of the ECB’s three-year operation, banks can take the 1 percent loans and then invest the cash elsewhere, for example in government bonds, or redeposit the funds with the central bank. Spanish Prime Minister Mariano Rajoy said on Jan. 30 the facility is boosting demand for Spanish government bonds.
Spanish banks’ ECB borrowings rose to 133.2 billion euros in January, the most on record, the Bank of Spain said today. Francisco Gonzalez, chairman of Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest bank, had said before the first three-year auction that such a measure would allow banks to buy more sovereign debt.
Italy and Spain are now rated the same by Moody’s, even as Spain’s debt burden was 61 percent of GDP at the end of 2010, compared with 118 percent for Italy. The extra yield on Italian bonds compared with Spanish equivalents has narrowed to 29 basis points, from as much as 202 basis points on Dec. 30.
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