Italy’s Financing Costs Plunge at 6 Billion-Euro Bond Sale

Italy, Spain Borrowing Costs Fall at Sales After Moody’s Cut
Italy sold 6 billion euros of bonds, meeting its target as its three-year borrowing costs fell to 3.41 percent, the lowest since March. Photographer: Victor Sokolowicz/Bloomberg

Feb. 14 (Bloomberg) -- Italy sold 6 billion euros ($7.9 billion) of bonds, meeting its target, as borrowing costs on its benchmark debt fell to the lowest since March even after the nation was downgraded by Moody’s Investors Service.

The Treasury sold 4 billion euros of benchmark securities due in November 2014 to yield 3.41 percent, down from 4.83 percent at the last auction of similar-maturity bonds on Jan. 13. Investors bid for 1.4 times the amount offered for the 2014 bonds, up from 1.22 times in January. The Rome-based Treasury also sold a total of 2 billion euros of bonds due in 2015 and 2017 to yield 3.77 percent and 4.26 percent respectively.

Italy’s borrowing costs have been falling as Prime Minister Mario Monti takes steps to spur the economic growth needed to reduce the euro-region’s second biggest debt and amid European Central Bank lending to the region’s bank that is shoring up demand for government bonds. Monti’s government passed 20 billion euros of budget cuts and tax increases in December to balance the budget in 2013. It followed last month with measures to spur competition and reduce bureaucracy.

Today’s auction “is a sign that the government’s efforts to make significant changes in the Italian economy are actually buying confidence amongst investors,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in a note published after the auction. “All lines were well absorbed, despite last night’s downgrade by Moody’s that in our view was somehow expected.”

Funding Needs

Italian bonds gained today, with the 10-year yield falling two basis points to 5.58 percent at 12:28 a.m. in Rome. The extra yield investors demand to hold the securities instead of benchmark German debt fell four basis points to 3.62 percentage points.

Italy, which needs to sell about 450 billion euros of debt this year, auctioned 12 billion euros in bills yesterday and rates on the one-year debt fell to the lowest since June.

Borrowing costs dropped even after Moody’s lowered Italy’s rating overnight to A3 from A2, citing a weak outlook and possible funding shocks for sovereigns and banks. Five other European nations were also downgraded.

Moody’s action came after Fitch Ratings and Standard & Poor’s lowered the country’s credit rating last month. Italian bond yields have fallen since those downgrades as the European Central Bank offered banks unlimited three-year loans, propping up demand for government securities. The Frankfurt-based ECB has also been purchasing Italian bonds since August.

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