Italy Yields Drop at Auction on Prospect of ECB Bond Buying

Italy’s borrowing costs dropped at an auction of five- and 10-year debt on optimism the European Central Bank may soon start buying euro nations’ bonds to make their funding more affordable.

Italy sold 7.29 billion euros ($9.2 billion) of five- and 10-year bonds today, near the maximum target for the auction. The Rome-based Treasury priced a new 10-year bond to yield 5.82 percent, down from 5.96 percent when a similar-maturity bond was sold on July 30. That was the least Italy paid to borrow for 10 years since July 13, still above the average auction result of 4.5 percent in the past 10 years.

The Treasury priced its five-year bond to yield 4.73 percent, compared with 5.29 percent last month. Italy also sold a 2017 floating bond to yield 5.33 percent. Investors bid for 1.42 times the amount of the 10-year bond sold, up from 1.29 last month. The bid-to-cover on the 4.75 percent five-year bond was 1.46 compared with 1.34 on July 30.

“There’s some optimism in the market that perhaps things won’t get worse than it is now,” said Charles Berry, a bond trader at Landesbank Barden Wuerttemberg in Stuttgart. “It’s encouraging to see that Italy can refinance itself at a lower cost than in previous sales.”

Photographer: Angel Navarrete/Bloomberg

Italy's Prime Minister Mario Monti told daily Il Sole 24 Ore yesterday that Germany would be scoring an “own goal” if it blocked plans for the ECB to shore up government borrowing costs, as it could find itself facing a serious inflation threat. Close

Italy's Prime Minister Mario Monti told daily Il Sole 24 Ore yesterday that Germany... Read More

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Photographer: Angel Navarrete/Bloomberg

Italy's Prime Minister Mario Monti told daily Il Sole 24 Ore yesterday that Germany would be scoring an “own goal” if it blocked plans for the ECB to shore up government borrowing costs, as it could find itself facing a serious inflation threat.

ECB Intervention

The ECB plan, outlined by President Mario Draghi on Aug. 2, entails intervention in sovereign-bond markets in tandem with Europe’s rescue funds -- in return for conditions. Spain and Italy, the countries currently most vulnerable to contagion from the crisis that began in Greece almost three years ago, have yet to decide whether to seek help.

Draghi may announce details of the program, which faces resistance from Germany’s Bundesbank, when the ECB’s Governing Council meets on Sept. 6.

Italian Prime Minister Mario Monti said yesterday at a joint press conference in Berlin with German Chancellor Angela Merkel that he was “very confident” the European Union will be able to devise appropriate tools to safeguard its future. The two leaders disagreed on whether the European Stability Mechanism, the region’s permanent bailout fund, should have a banking license that would allow it to tap funds from the ECB, which Merkel said is “not compatible” with European treaties.

Banking License

A banking license for the ESM should “be seen in the perspective of a broad mosaic,” Monti said. “Some things that aren’t possible today under current conditions could become possible tomorrow under different conditions.” Modifications to the treaties can be asked for, “though changes should not be made lightly,” he said.

Monti told daily Il Sole 24 Ore yesterday that Germany would be scoring an “own goal” if it blocked plans for the ECB to shore up government borrowing costs, as it could find itself facing a serious inflation threat.

Italian 10-year bonds declined, pushing the yield on the securities up three basis points to 5.80 percent as of 1:41 p.m. in Rome. The spread with similar-maturing German debt widened seven basis points to 446 basis points. Today’s sale comes after Italy yesterday sold 9 billion euros of 181-day Treasury bills at the lowest rate since March. The country redeems 11.5 billion euros in zero-coupon bonds tomorrow.

“A larger decline in average yields may have been expected in face of supportive redemption and coupon flow,” Rabobank strategist Lyn Graham-Taylor wrote in an e-mailed comment.

Rates more than halved at an auction of Spanish bills on Aug. 28 amid expectations the central bank will move ahead with its plan to lower borrowing costs. Merkel is scheduled to travel to Madrid next week, where Spanish Prime Minister Mariano Rajoy is mulling a request for a second European bailout a month after seeking 100 billion euros in loans for Spain’s banks.

“We expected today’s bid-to-cover to be slightly higher,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in a note. “However, if we consider that the amount on offer was at the top of the target, the outcome is not too bad.”

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

To contact the editors responsible for this story: Jerrold Colten at jcolten@bloomberg.net

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