Italy’s Borrowing Costs Rise at Auction on Contagion Concern

Italy’s 10-year borrowing costs rose to the highest in almost three years at a second day of bond sales in the midst of concern about contagion from the sovereign-debt crisis.

Italy sold 7.9 billion euros ($11.3 billion) of debt today, including 3 billion euros of 2021 bonds that yielded 4.94 percent. That’s the highest yield since a sale in October 2008, and compares with 4.73 percent when similar securities were last auctioned on May 30. Investors demanded 1.33 times the amount of 10-year bonds sold, compared with 1.50 at the last sale.

Italy’s borrowing costs jumped yesterday at a sale of six-month securities, the first offering since Moody’s Investors Service said it may downgrade some of the nation’s banks and as Greek politicians began a debate on austerity measures needed to avoid a default. Italian bank stocks fell today, with Banca Monte dei Paschi di Siena SpA dropping as much as 5.5 percent.

“Yields have risen, but so far it’s not the same kind of dynamic that we’ve seen in Portugal, Greece or Ireland,” said Glenn Marci, a strategist at DZ Bank AG in Frankfurt. “We’ll see spreads widening for some time until the Greek topic is really resolved. It’s more a contagion topic, because fundamentally Italy hasn’t changed. They’re not doing great but they’re also not doing really badly.”

Italy’s 10-year debt yield trails the 5.67 percent yield for its Spanish equivalents as of 11:30 a.m. London time today. The Portuguese 10-year yield was 11.07 percent, Ireland’s was 11.58 percent and Greece’s was 15.86 percent.

Greek Vote

Greek Prime Minister George Papandreou faces his second survival test in a week tomorrow when lawmakers vote on the package that’s needed before the cash-strapped nation can tap a fifth loan payment from last year’s 110 billion-euro rescue. Failure to pass the government’s 78 billion-euro plan may lead to the euro area’s first sovereign default.

The extra yield that investors demand to hold Italian 10-year bonds instead of similar-maturity German bunds, the region’s benchmark government securities, was at 212 basis points today after rising to a euro-era record of 223 basis points yesterday. Moody’s placed Italy’s Aa2 local and foreign-currency government bonds under review for a possible downgrade on June 17, before putting the banks on review six days later.

Italy also sold 2.6 billion euros of 2014 bonds today to yield 3.68 percent, compared with 3.43 percent when similar debt was last sold on May 30. Investors demanded 1.39 times the amount of bonds sold, compared with 1.34 at the last sale.

The Rome-based Treasury also auctioned 2 billion euros in 2018 bonds to yield 3.38 percent and 991 million euros of 2015 floating rate bonds with a yield of 3.17 percent.

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