Italy Borrowing Costs Drop at Sale as Spanish Crisis Deepens

Italy’s borrowing costs dropped at an auction of five- and 10-year bonds, indicating investors view the country as a safer bet than Spain, where yesterday 10-year bond yields climbed the most this month as anti-austerity protests turned violent.

Italy sold 6.65 billion euros ($8.55 billion) of five- and 10-year bonds today, almost matching the 7 billion-euro maximum target. The Rome-based Treasury priced a 10-year bond to yield 5.24 percent, down from 5.82 percent when a similar-maturity bond was sold on Aug. 30, and it’s the lowest Italy paid to borrow for 10 years since March 29.

The Treasury priced its five-year bond to yield 4.09 percent, compared with 4.73 percent last month. Italy also sold a 2017 floating bond to yield 4.56 percent.

The European Central Bank’s plan to buy unlimited short- term debt of distressed euro countries has helped lower Italy’s borrowing costs. Still, Spain’s hesitation to seek aid, coupled with concerns about the European economic outlook, risks renewed pressure on Italy, burdened by Europe’s second-biggest debt.

“For the time being, Italy is passing the ’Spanish contagion’ test,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note after the auction. “Despite the escalating crisis in Spain, Italy was able to pull off a fairly successful auction of longer-dated paper, with a significant fall in yields.”

Italy’s 10-year bond rose 2 basis points to 5.23 percent at 11:31 a.m. in Rome, pushing the difference with comparable- maturity German bunds to 378 basis points.

’Decent Demand’

At today’s auction investors bid for 1.33 times the amount of the 10-year bonds, down from 1.42 last month. The bid-to- cover on the 4.75 percent five-year bond was 1.38, compared with 1.46 on Aug. 30.

Demand “was decent but not exceptionally strong,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in a note to clients. “Investors are still skeptical about the development of the euro debt crisis and we can’t rule out further volatility in cross-country spreads in the coming sessions.”

The ECB bond-buying plan, first announced 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.

Italian Prime Minister Mario Monti, who championed the idea of the rescue funds buying bonds, has said that his country doesn’t need external help for the moment. Spanish Prime Minister Mariano Rajoy has said he would consider making an aid request to bring down borrowing costs, though a final decision would depend partly on what kind of conditions are attached to the support.

Spanish Turmoil

Yesterday Spanish 10-year yields rose the most this month on concern the country faces a constitutional crisis after its richest region called early elections and that recapitalization of the nation’s banks faces new hurdles.

Catalonia will vote on Nov. 25 to determine greater independence as local lawmakers battle Rajoy’s austerity measures. He meets ministers today to approve a 2013 budget as protests in the capital and dissent from regional leaders deepen his predicament.

The premier’s efforts to rescue the nation’s lenders also face trouble after Germany, the Netherlands and Finland said the region’s bailout fund, the European Stability Mechanism, should assume only a limited burden. That may rule out the ESM from being used to deal with the 100 billion euros in aid Spain sought for its banks in June.

Monti said yesterday that Spain is taming its budget and that improved fiscal oversight will help lower borrowing costs for troubled euro members.

“Spain is doing very deep and serious things in terms of budgetary control and in terms of structure reforms,” Monti said in an interview on the “Charlie Rose” show on PBS television. “Spain is decidedly on the right path and will come out of it -- I mean come out of the risky zone.”

Today’s Italian bond auction follows yesterday sale of 9 billion euros of 181-day bills at the lowest rate since March.

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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