Italy Auctions EU7 Billion of Bonds as ECB Buoys Investor Demand

Italy to Test Markets Again in 8.5 Billion-Euro Bond Auction
A pedestrian is reflected in a screen displaying the share prices of Italian companies, in the window a BNP Paribas SA branch in Milan, Italy. Photographer: Gianluca Colla/Bloomberg

Italy auctioned 7 billion euros ($9 billion) of debt to bring the total raised this week to almost 20 billion euros, underscoring how the European Central Bank is helping the world’s fourth-biggest borrower tap markets.

Today’s sale by the Treasury in Rome fell short of the 8.5 billion-euro target even as borrowing costs declined from last month. Italy sold 9 billion euros in bills yesterday at about half the rate of the previous sale last month in its first auction since the ECB loaned 489 billion euros to banks to ease credit amid the region’s debt crisis.

“Italy was not able to raise the maximum amount they wanted to, but the fact that they managed to sell this much at the end of the year should be taken as a positive sign,” said Eric Wand, a fixed-income strategist at Lloyds TSB Bank Plc in London. “The level of excess liquidity from the ECB will remain elevated for a while and some of that may get recycled into sovereign debt. That should support short-dated peripheral bonds.”

With an economy sinking into its fourth recession since 2001, Prime Minister Mario Monti’s government expects to raise almost half a trillion euros from bond and bill sales next year. It has to repay about 53 billion euros in bonds in the first quarter from the region’s total maturing bonds of 157 billion euros, according to Swiss lender UBS AG.

Monti’s Defense

At a year-end press conference in Rome today, Monti said Italy’s borrowing costs -- more than triple Germany’s for 10 years -- were unjustified. He said he was preparing measures aimed at cushioning the economic slump, including deregulating labor markets and lowering fuel prices.

“I’m an economist and realize that the measures we’ve adopted have many negative points,” said Monti, calling for a “European” solution to the debt crisis. “We aren’t the ones who set goals like balancing the budget in 2013; it’s a goal that was accepted by the previous government” and agreed upon “with European institutions.”

Monti, a former European Union commissioner, pushed through a 30 billion-euro package of austerity and growth measures last week after taking over in November from former Prime Minister Silvio Berlusconi, who lost his majority in Parliament as Italy’s borrowing costs soared to record highs amid the worsening debt crisis.

Euro Declines

The euro fell to its lowest against the dollar since September 2010 and 10-year Italian notes slid after today’s sale, keeping their yield above 7 percent, the level that led Greece, Ireland and Portugal to seek bailouts. Short-term securities rose.

The Frankfurt-based central bank bought Italian bonds today, according to two people with knowledge of the transactions who declined to be identified because the trades are confidential. An ECB spokesman declined to comment when contacted by phone.

Italian 10-year bonds stayed lower after the auction. The 10-year yield was 7.01 percent at 3:41 p.m. Rome time, pushing the difference with German bunds to 514 basis points. The five-year yield was down seven basis points at 6.16 percent, as investors pointed to the ECB as buoying the shorter-term debt.

Yields Ease

The Treasury sold today 2.5 billion euros of securities due in 2014, less than the 3 billion euro maximum for the sale, to yield 5.62 percent. That was down from 7.89 percent at the previous sale on Nov. 29. The Treasury priced 2.5 billion euros of its 5 percent 2022 bond to yield 6.98 percent, compared with 7.56 percent on Nov. 29. Italy also sold about 2 billion euros of bonds due 2021 and a floating-rate security due 2018.

“Italy’s 2011 auction program has ended on a slightly optimistic note,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in a phone interview from London. Still, “buying 10-year Italian bonds is a leap of faith which investors are prepared to take only at very high interest rates.”

Italy yesterday auctioned 9 billion euros in treasury bills for 3.251 percent. That was about half the rate from the previous auction on Nov. 25.

Italian lenders borrowed 116 billion euros as part of the ECB’s offer of unlimited three-year funds on Dec. 21, according to a person with knowledge of the loans.

“Relative to where we were a month ago, before the three-year operations were announced, the funding outlook looks easier,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Italy can afford to fund at high yields like 7 percent for much longer than the market tends to fear.”

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