Italy Yields Drop at Auction on Prospect of ECB Bond Buying

Italy Yields Drop at Auction on Prospect of ECB Bond Buying
Italy sold 4.73 billion euros ($5.8 billion) of 5- and 10-year bonds. Photographer: Alessia Pierdomenico/Bloomberg

Italy’s borrowing costs dropped at an auction of 5-year and 10-year debt on speculation the European Central Bank may buy euro nations’ bonds to stabilize their economies.

Italy sold 4.73 billion euros ($5.8 billion) of 5- and 10-year bonds. The Rome-based Treasury priced the 10-year debt to yield 5.96 percent, down from 6.19 percent on June 28. The Treasury priced its 5-year bond to yield 5.29 percent, compared with 5.84 percent last month.

Italy also sold 750 million euros of a 3% 2015 bond to yield 4.49, bringing the total amount sold to 5.48 billion-euros, near the 5.5 billion euros that was the maximum target for the auction.

“Expectations that the ECB will contribute to more forceful policy action to bring down Spanish and Italian yields are running high,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., a London consulting firm specializing in sovereign-credit risk, said in an e-mailed note. The Italian Treasury couldn’t have issued longer-dated paper at a better time, he said.

ECB President Mario Draghi is trying to persuade policy makers to agree on a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, two central bank officials said July 27, asking not to be identified because the talks are private.

Italy’s 10-year yield was up 6 basis points at 6 percent at 11:34 a.m. in Rome, pushing the difference with German Bunds to 464 basis points.

’Under Pressure’

The ECB is under pressure to lower borrowing costs after three interest-rate cuts since November failed to stop bond yields soaring in Spain and Italy, threatening the survival of the euro.

Draghi, who meets with U.S Treasury Secretary General Timothy Geithner in Frankfurt today, sparked a global market rally last week by pledging to do whatever it takes to preserve the euro. His proposal involves Europe’s rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the two central bank officials said.

The ECB, which holds its next meeting on Aug. 2, has disbursed more than 1 trillion euros to European lenders through its longer-term refinancing operation, or LTRO, since December.

German Chancellor Angela Merkel, French President Francois Hollande and Prime Minister Mario Monti have already endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the 17-nation euro.

Merkel and Monti agreed by phone on July 28 that the EU’s June summit decisions “must be implemented without delay,” according to a statement by the Italian premier’s office. Monti agreed to travel to Berlin for talks with Merkel in the second half of August, and will meet with Hollande tomorrow in Paris, according to his agenda.

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