Italy, Spain Sell $24 Billion of Debt; Bonds Rise After Sale

Italian Borrowing Costs Jump at $8.8 Billion Auction
A machine counts euro notes at a branch of UniCredit bank in Milan. Photographer: Giuseppe Aresu/Bloomberg

Italy and Spain sold 17.7 billion euros ($23.9 billion) of debt and their bonds rose after the sale even as both countries had to pay more to borrow than a month ago.

Italy sold 8 billion euros of 182-day bills to yield 3.071 percent, up from 2.14 percent at the last auction of similar-maturity debt on Aug. 26. The Rome-based Treasury also sold 76-day bills at 1.808 percent and zero-coupon bonds due in 2013 at 4.511 percent. Spain’s interest costs also rose as it sold 3.22 billion euros of three- and six-month bills, just below the maximum target for the auction.

Spain’s auction was “a very good result” and “in the near term, assuming Greece receives its disbursement, we are in for at least a short period of relatively less volatile markets,” said Matteo Regesta, senior interest-rate strategist in London at BNP Paribas SA, referring to Greece’s next bailout payment. “The yield was a little bit up, but nevertheless the take-up was significant and the yield pick-up not massive.”

The European Central Bank began buying Spanish and Italian debt in August after concern about a Greek default sent their borrowing costs soaring to euro-era highs. A euro-area central bank official said yesterday that the ECB is likely to debate restarting covered-bond purchases and may discuss interest-rate cuts to ease funding strains at its Oct. 6 policy meeting.

Spreads Narrow

The premium investors demand to hold Italian and Spanish 10-year bonds instead of German bunds narrowed after the sale, as European stocks gained for a third day. The Italian spread eased to 369 basis points from 381 basis points yesterday and the extra yield on Spanish debt narrowed to 319 basis points from 333 basis points yesterday.

German Chancellor Angela Merkel, who met Greek Prime Minister George Papandreou today in Berlin, has stepped up her defense of the euro. Merkel said on Sept. 9 closer financial and economic coordination “is the only way forward” to escape the crisis. Countries sharing debt in the form of joint bonds may be possible in the “distant future,” she added on Sept 21.

A debt of 1.9 trillion euros -- more than Spain, Greece, Ireland and Portugal combined -- leaves Italy vulnerable to any advance in yields as it refinances maturing debt. Today’s sale will help cover the redemption of 8 billion euros of bills on Sept. 30. Italy still faces 55 billion euros of bill maturities before the end of the year.

Funding Needs

Spain has one bond redemption left this year of 14 billion euros, and expiring bills worth about 23 billion euros, according to data from the Treasury in Madrid. The Treasury says it times its redemptions to coincide with peaks in tax-revenue collection, while government data show it had 40 billion euros in cash at the Bank of Spain at the end of June.

Demand for the Italian 182-day bills today was 1.74 times the amount on offer, compared with 1.66 times last month. The bid-to-cover ratio for the Spanish three-month debt was 2.47 times, down from 7.62 times last month, while the six-month note was 3.95 times oversubscribed, compared to 3.6 last month.

Divisions among European leaders on aiding Greece and protecting Spain and Italy from the crisis are sapping demand for those nations’ bonds. U.S. Treasury Secretary Timothy F. Geithner called on European governments on Sept. 24 to strengthen the region’s 440 billion-euro bailout fund, saying that failure to stem the crisis risks “cascading default, bank runs and catastrophic risk.”

In return for the ECB bond purchases, Prime Minister Silvio Berlusconi delivered a 54 billion-euro austerity package that aimed to eliminate Italy’s budget deficit in 2013, one year earlier than planned. The plan wasn’t enough to stop Standard & Poor’s from cutting the nation’s credit rating on Sept. 19.

Adding to uncertainty in the euro region’s periphery, Spanish Prime Minister Jose Luis Rodriguez Zapatero dissolved Parliament yesterday before early elections on Nov. 20. While the assembly is disbanded, any decrees the government may pass to tackle the crisis must be approved by an extraordinary procedure at the assembly’s permanent committee. While Zapatero said yesterday that he didn’t plan any “significant” measures before the election, he will act “if necessary.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE