Italian Borrowing Costs Jump at $7.9 Billion Auction

Italian Borrowing Costs Rise at Auction of Benchmark Bonds
A one euro sign sits on a box containing models of Italian landmarks at a souvenir stall in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Italy sold 5.95 billion euros ($7.9 billion) of bonds today and the country paid 60 basis points more than a month ago to sell 10-year debt as Standard & Poor’s downgrade of Spain fueled concern about securities of so-called peripheral countries.

The Treasury sold the 10-year benchmark at a rate of 5.84 percent, up from 5.24 percent at the previous auction on March 29. Investors bid for 1.48 times the amount offered, down from 1.65 times last month. The Treasury also sold 2.42 billion euros of five-year debt to yield 4.86 percent compared with 4.18 percent at the previous auction last month.

Italian bonds were weaker going into the auction after Standard & Poor’s cut its rating on Spain by two levels to BBB+ yesterday, saying the country may need to pour more money into shoring up the nation’s banks. Italian and Spanish 10-year yields have both risen about 60 basis points this month after both countries pushed back deficit-reduction goals, citing the deepening recession.

“The auction went O.K. in terms of demand also because the market cheapened into the sale,” Biagio Lapolla, a rate strategist at Royal Bank of Scotland Group Plc in London, said by phone. “The Spanish downgrade has already been priced in by the markets and while a clear negative, it is unlikely to have a significant impact on Italy and the other peripheral countries on its own.”

Bonds Decline

The Italian treasury also sold two bonds due 2016 and 2019 to yield 4.29 percent and 5.21 percent respectively. The treasury managed to sell the maximum target of 2.5 billion euros of the 10-year bonds, though fell short of the maximum 6.25 billion euros for the entire sale, placing 5.95 billion euros of the securities.

Italian 10-year government bonds stayed lower after the auction, with the yield rising eight basis points higher to 5.72 percent at 1:35 p.m. Rome time. Five year-note yields climbed 15 basis points to 4.92 percent. Today’s sale comes after borrowing costs jumped at an auction of six-month bills yesterday as the Treasury was forced to offer higher rates to attract investors.

Demand for the benchmark bonds was “O.K. but the Spanish debt downgrade certainly led to more caution amongst market dealers who might see further debt agency action also on the Italian debt,” Annalisa Piazza, a strategies at Newedge Group in London, wrote in an e-mail to investors today. “The country is struggling to remain afloat with the negative effects of the austerity measures.”

Italy now expects its economy to shrink 1.2 percent this year, while Spain’s will contract 1.7 percent, complicating efforts to rein in budget deficits. Germany, Europe’s biggest economy and the largest contributor to bailouts for Greece, Portugal and Ireland, is facing demands from across the region to ease its emphasis on austerity as a $1 trillion firewall and unlimited loans by the European Central Bank fail to settle markets and stop the crisis from threatening Spain and Italy.

Europe’s fiscal-austerity push, while necessary, risks coming to an “inglorious end” without policies that stimulate demand and supply, Italian Prime Minister Mario Monti, who is pushing through 20 billion euros of austerity measures at home, told a conference in Brussels yesterday.

European Central Bank president Mario Draghi used a speech in Brussels on April 25 to urge European leaders to widen their crisis response beyond cutting debt and deficits, the goal of the German-led fiscal pact signed by euro-area leaders in March.

French socialist presidential frontrunner Francois Hollande is making softening austerity policies a central plank of his campaign. Hollande, who beat Sarkozy in the first round of his re-election bid, has already said that his country won’t ratify the pact in its current form if he is elected, raising concerns about the future of French-German cooperation to fight the crisis.

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