Italy Yields Drop at Auction as ECB Pledge Offsets Concern

Italy’s borrowing costs dropped at a bond sale, clearing a second market hurdle this week as the European Central Bank’s pledge to buy bonds offsets concern that pending elections may erode the country’s commitment to economic reforms.

The Treasury in Rome today sold a total of 4.22 billion euros ($5.51 billion) of bonds, near its 4.25 billion-euro maximum target for the auction. Italy sold 3.5 billion euros of a new three-year bond at 2.50 percent, down from the 2.64 percent paid on similar-maturity debt Nov. 14 and the lowest yield since Oct. 28, 2010. It also sold 729 million euros of a 2026 bond to yield 4.75 percent.

Prime Minister Mario Monti’s Dec. 8 decision to resign as soon as the budget is passed, announced after former Premier Silvio Berlusconi’s party withdrew support for the his unelected government, pushed the Italian 10-year yield up by 29 basis points on Dec. 10, the biggest gain since August. The selloff was short lived, as investors remain reluctant to shun the country’s debt with the ECB standing by as a backstop.

“Despite the twists and turns of Italian politics, Italy’s bond market continues to shrug off the growing uncertainty surrounding the outcome of next year’s parliamentary election,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail. “Sentiment toward Italy is being heavily shaped by the ECB’s new bond-buying program.”

Investor Demand

Italy’s 10-year yield declined 1.6 basis points to 4.63 percent at 1:27 p.m. in Rome. That left the difference with comparable-maturity German debt at 329.8 basis points.

At today’s auction, which allowed the Treasury to complete its funding program for this year, investors bid for 1.36 times the amount of the three-year debt offered, down from 1.50 times last month.

“Demand was decent and in line with expectations,” Annalisa Piazza, a strategist at Newedge Group in London, wrote in an e-mail to clients. The Italian Treasury will have to sell more than 400 billion euros in 2013.

The auction, which was probably helped by 18.7 billion of bond redemptions due Dec. 15, comes after Italy paid the least since March 13 yesterday to sell one-year bills. Today Spain also tested the market’s appetite, meeting its maximum target of 2 billion euros for the sale, including the longest-maturity bond it has auctioned for more than a year.

‘Political Vacuum’

While Monti said this week investors shouldn’t fear a “political vacuum,” the threat of political turmoil has been rising. Berlusconi threw his week-old political comeback into doubt yesterday, signaling he’d yield if Monti agrees to enter the election campaign as part of a coalition of “moderates.”

“Probably no clear winner will emerge from the elections,” Nicola Marinelli, who oversees $160 million at Glendevon King in London, said by phone, adding that Berlusconi’s party and the anti-austerity movement led by former comic Beppe Grillo may get more votes than expected. “While the lower house would probably have a center-left majority, the upper house may remain in the hand of the right.”

Any rise in borrowing costs, even temporary, has an immediate impact on Italy, which needs to sell an average of more than 30 billion euros of bonds and bills a month to finance the euro-region’s second-biggest debt, currently at more than 126 percent of gross domestic product.

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

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

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