Italy Sells 7 Billion Euros of Bonds as Borrowing Costs Drop

Italian borrowing costs dropped at an auction of five and 10-year debt as investors shrugged off a threat by former premier Silvio Berlusconi to topple Prime Minister Mario Monti’s government.

The Rome-based Treasury matched the maximum target for the sale. Italy sold 3 billion euros ($3.9 billion) of a 10-year benchmark bond at 4.92 percent, the lowest since May 30, 2011, and down from 5.24 percent at the last auction on Sept. 27. The Treasury also sold 4 billion euros of a new 2017 bond to yield 3.80 percent, down from the 4.09 percent paid at the auction a month ago.

“The good result of the auction shows that the recent rise of Italian bond yields was externally driven and linked to uncertainties in Spain and Greece,” Mario Spreafico, chief investment officer at Schroders Private Banking in Milan, said by phone. “Clearly domestic political risk is not having any impact.”

Berlusconi said Oct. 27 he may pull his party’s support for Monti, sparking concern that Monti’s government might not remain in power until elections due by May. The following day the anti-austerity 5 Star movement led by Beppe Grillo made a strong showing in the Sicilian regional elections, seen as a barometer for next year’s national vote. No political coalition won an outright parliamentary majority and Grillo’s movement got almost 15 percent, becoming the biggest political force in Sicily, though its candidate for regional governor came in third.

Redemptions

“The yields are very acceptable and very manageable,” Maria Cannata, head of the country’s debt agency, said in Milan today. “There are no problems of sustainability.” Some volatility is to be expected on markets and a gradual drop in yields is preferable to big swings, she said.

Today’s auction was probably helped by 13.5 billion euros in redemptions on Nov. 1. Investors bid for 1.43 times the amount of the 10-year bonds, up from 1.33 last month. The bid- to-cover on the five-year bond was 1.49, compared with 1.38 in September.

Italy’s 10-year yield fell 4.2 basis points to 4.97 percent at 12:35 p.m. in Rome, snapping three days of increases and narrowing the difference with comparable maturing German debt to 349.5 basis points.

Italy plans to reduce the amount of short-term debt it auctions during the rest of the year after the sale of retail bonds this month attracted 18 billion euros of orders, more than the previous two offers combined, a Treasury official said Oct. 22.

Growing Divide

At a press conference in Madrid after meeting his Spanish counterpart Mariano Rajoy yesterday, Monti dismissed concerns that his government would fall and said that he can’t be threatened by lawmakers pushing for changes to his economic policy.

The two leaders masked a growing divide over Europe’s new bailout strategy. Asked whether Italy would request a bailout alongside Spain, Monti said Italy doesn’t need external aid, indicating Spain will probably have to request it alone in negotiations with European authorities.

Rajoy is resisting international pressure to seek a credit line from the European Stability Mechanism rescue fund. That would enable the European Central Bank to buy Spanish debt on the secondary market, a prospect that helped lower the nation’s borrowing costs.

Italy may benefit indirectly from a backstop for Spain as such a move would probably prompt a relief rally in peripheral bond markets. While the country continues to be seen by investors as a safer bet than Spain, Rajoy’s hesitation in requesting a bailout risks putting Italy under renewed pressure.

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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