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Italy Auction Misses Target as Yields Climb on Contagion

Italy Moves Into Debt-Crisis Crosshairs After Spain Bank Rescue
Italy moves into the frontline of Europe's debt crisis after Spain's $125 bailout. Photographer: Alessia Pierdomenico/Bloomberg

Italy sold less than the maximum amount of debt and borrowing costs rose at an auction as concern deepened the debt crisis is spreading, driving the 10-year yield to 6 percent for the first time in two weeks.

Italy auctioned 5.73 billion euros ($7.1 billion) of five-and 10-year bonds, less than the 6.25 billion-euro maximum target for the sale. The Treasury priced the 10-year debt to yield 6.03 percent, the highest since Jan. 30 and up from 5.84 percent at the previous auction on April 27.

“While things are going from bad to worse in Spain, the uncertainty surrounding Greece’s membership of the euro zone is weighing heavily on sentiment,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in a note after the sale. “Italy is currently experiencing an externally driven deterioration in its perceived creditworthiness.”

European leaders remain divided on solutions to prevent a breakup of the 17-nation currency bloc. As they put pressure on Greece to meet bailout terms before elections next month, concern is growing that Spanish lenders will need more financial support to weather the crisis.

Spread Widens

The yield on Italy’s 10-year bond rose 17 basis points to 5.933 at 1:35 p.m. in Rome, after reaching 6.01 percent earlier. The jump in yield pushed the difference with similar maturity German debt to 461 basis points, the most since Jan. 19.

Greeks vote June 17 after an inconclusive May 6 ballot led to a political impasse and raised speculation that the country may leave the single currency. Spanish borrowing costs are rising as its government tries to find a way to shore up the Bankia group without overburdening the public finances. The five year debt was sold to yield 5.66 percent, compared with 4.86 percent for a similar-maturity bond sold last month.

“Market dealers remain extremely cautious as the next three weeks are crucial to see the future of the monetary union,” Annalisa Piazza, a strategist at Newedge Group in London, wrote in a note to investors. “Despite the attractive yield pickup for Italian bonds, dealers seem to be willing to remain on a wait-and-see mode.

The Italian Treasury sold 2.34 billion euros of the 10-year bond, less than the 3.5 billion euro maximum target. Investors bid for 1.4 times the amount of deft offered, down from 1.48 times last month.

The Treasury also sold 3.4 billion euros of a new five-year security to yield 5.66 percent, compared with 4.86 percent for a similar-maturity bond sold last month. Investors bid for 1.35 times the five-year debt on offer, little changed from the 1.34 times on April 27.

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