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Italy Borrowing Costs Rise at Auction on Crisis Concerns

April 24 (Bloomberg) -- Italy was forced to pay 1 percentage point more than a month ago to sell zero-coupon bonds in the first auction since Prime Minister Mario Monti’s government moved back its balanced-budget target.

The Treasury sold 2.5 billion euros ($3.3 billion) of the zero-coupon 2014 debt to yield 3.355 percent, up from 2.352 percent at the previous auction on March 27. Investors bid for 1.80 times the amount offered, down from 1.86 times last month. The Rome-based Treasury also sold 943 million euros of inflation-linked bonds due in 2017 and 2019 to yield 3.88 percent and 4.32 percent, respectively. The auction’s maximum target was 3.5 billion euros.

Investor confidence in the debt of Europe’s so-called peripheral countries has eroded since Spain’s announcement on March 2 it won’t meet its deficit target this year, leading to six weeks of declines of Italian bonds. Monti last week delayed its goal to erase the deficit by one year to 2014, joining Spain in missing fiscal targets amid a worsening recession.

“The yields were higher than last month, but there was no overshooting and all in all the sales went quite well,” said Annalisa Piazza, a fixed-income strategist at Newedge Group in London. “The zero-coupon bonds are usually requested by domestic investors, which explains the fact that the bid-to-cover ratio was in line with the most recent auctions.”

Spanish Sale

Italy’s 10-year bond, which initially rose after the auction, pared the gains to yield 5.74 percent at 12:09 p.m. Rome time, pushing the difference or spread with similar-maturing German debt to 407 basis points. That compares with 372 basis points the day before Monti announced new budget forecasts on April 18.

Spain sold 1.9 billion euros of bills, missing the maximum target even after reducing the goal, and its borrowing costs almost doubled. The country’s 10-year bond yield was 5.91 percent after the auction, compared with 6 percent yesterday. The gap between Spanish and German bond yields narrowed to 423 basis points.

“Italy’s edge over Spain right now is that its domestic banks appear to be in a stronger position to support their sovereign,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note. “The flip side to this argument is that, given Italy’s much larger funding requirements, there is even more pressure on local banks to prop up its bond market.”

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net; Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Jerrold Colten at jcolten@bloomberg.net

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