Italian Yields Rise at Auction as Concern on Spain Mounts

Italy’s borrowing costs rose at an auction of three-year debt today on concern that Spain’s reluctance to request a bailout will weigh on Italian bonds.

The Rome-based Treasury sold 3.75 billion euros ($4.8 billion) of its benchmark three-year bond to yield 2.86 percent, more than the 2.75 percent at the last auction of the same securities on Sept. 13. Investors bid for 1.67 times the amount offered, up from 1.49 times last month.

European Central Bank President Mario Draghi’s pledge to attack surging borrowing costs by buying bonds of distressed nations in tandem with the European Union helped lower Spanish and Italian yields after a surge in July. The yields are now creeping back up after Spanish Prime Minister Mariano Rajoy last week pushed back expectations of a bailout, telling reporters no request was imminent.

“The higher yields simply reflect the recent volatility in the euro-region periphery’s spreads,” Annalisa Piazza, a fixed- income analyst at Newedge Group in London, wrote in a note to clients after the auction. “However, today’s auction is a sign that dealers are still willing to buy Italian paper as the country’s fiscal progress seems to be on track”.

Bond Redemptions

Italy also sold a total of 2.25 billion of bonds due in 2016, 2018 and 2025 to yield respectively 3.42 percent, 4.06 percent and 5.24 percent. Today’s sale, probably helped by 18 billion euros in redemptions on Oct. 15, comes after Italy auctioned 11 billion euros of bills yesterday.

Italy’s 10-year bond yield fell 4 basis points to 5.07 percent at 11:43 a.m. in Rome, leaving the difference with comparable maturity German bunds at 361 basis points.

International Monetary Fund Chief Economist Olivier Blanchard suggested on Oct.9 that bond yields in Spain and Italy may reverse the recent declines if the countries hold off on requesting bailouts. Italian Prime Minister Mario Monti reiterated this month that Italy doesn’t plan to request bond buying for now.

Standard & Poor’s said Spain’s creditworthiness is being constrained by “a policy-setting framework among the euro-zone governments that still lacks predictability” in its decision yesterday to cut the country’s rating to BBB-, one level above junk.

Seeking Conditions

Rajoy’s deputy, Soraya Saenz de Santamaria, said last week that the government needs to ensure a request for help from the permanent rescue fund, the European Stability Mechanism, would be granted before it can call for aid. A bid to the ESM is needed to trigger support from the ECB.

“The key question going forward is whether Italy’s debt market will come under increased strain because of growing uncertainty about Spain,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in note after the auction. “There’s a significant risk that Madrid is not going to apply for a bond-buying programme any time soon.”

Italy’s 10-year yield remains almost 100 basis points above its average for the past decade. Still, Italy’s sovereign debt, currently about 120 percent of gross domestic product, is sustainable at current yields, debt agency head Maria Cannata said in an interview in Rome Oct. 9. Italy was forced to revise up its gross issuance for this year by about 20 billion euros, Cannata said.

Funding Needs

“We originally planned to issue a total of 440 billion to 450 billion euros this year,” she said. “The final amount will be about 20 billion euros more because of the way things developed, the weak economy influenced,” Cannata said.

Cannata said 2013 will “surely be a less stressful year” for Italy, which is burdened by the euro-region’s second-biggest debt, as bond redemptions are will be more than 40 billion less than in 2012 and better distributed throughout the year. The country’s net funding needs will drop by 20 billion next year, she said.

The Treasury is considering selling a new 15-year or even 30-year benchmark bond next year should demand continue to improve, Cannata said.

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

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

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