Italy Sells Bills at Lowest Rate Since March on ECB Plan

Italian Prime Minister Mario Monti
Italian Prime Minister Mario Monti, who championed the idea of the EU’s rescue funds buying bonds, has said that Italy doesn’t plan to request aid for now. Photographer: Alessia Pierdomenico/Bloomberg

Italy sold six-month bills at the lowest rate since March as the European Central Bank’s pledge to buy debt of distressed euro-region countries led to a plunge in borrowing costs.

The Treasury in Rome sold 9 billion euros ($11.6 billion) of 181-day bills at 1.503 percent, down from 1.585 percent at the last auction of similar-maturity debt on Aug. 29. That was the lowest rate since March 28, when Italy paid 1.119 percent to sell six-month debt. Investors bid for 1.39 times the amount of bills offered today, down from 1.69 times last month.

Italian 10-year bond yields have dropped more than 100 basis points since ECB President Mario Draghi first signaled on Aug. 2 that the central bank was willing to buy bonds of euro-region countries to bring down borrowing costs. Draghi’s new bond-buying program will work in tandem with debt-purchases by the European Union’s bailout funds and impose conditions on any government making a request.

Italian Prime Minister Mario Monti, who championed the idea of the rescue funds buying bonds, has shied away from a request, partly on concern about the conditions.

Italian and Spanish bonds both declined today, with the yield on Italy’s 10-year bond up seven basis points to 5.17 percent at 1:11 p.m. in Rome. The difference with comparable-maturity German bunds was 365 basis points.

Biggest Risk

“The biggest risk to Italy right now is the deepening political and economic crisis in Spain,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note after the auction. With Spanish Prime Minister Mariano Rajoy in “no hurry” to request ECB-backed aid, “the main worry in Rome is the longer Spain dithers, the greater the scope for investor nervousness to spread to Italy.”

Spain’s 10-year bond yield rose 26 basis points to 6.01 percent today, the biggest increase since Aug. 31, after Germany, the Netherlands and Finland said the region’s bailout fund, the European Stability Mechanism, should assume only a limited burden in bank recapitalizations. That may rule out the ESM from being used to deal with the 100 billion euros in aid Spain sought for its banks in June.

Rajoy has said he would consider making an aid request to bring down borrowing costs, though a final decision would depend partly on what kind of conditions are attached to the support. Spain requesting a bond-buying program could help lower interest rates in the euro area and show that the ECB can defend transmission of its monetary policy, Bank of Italy Director General Fabrizio Saccomanni said in an interview with Bloomberg Television in Rome on Sept. 24.

Structural Rates

“Application of this new facility by Spain would sort of show to markets that the European Union now has the instruments to deal with this systemic problem regarding the transmission of monetary policy that could have a beneficiary effect on all the structural market interest rates,” Saccomanni said.

The Italian Treasury has met more than 75 percent of its funding needs for 2012 and may auction a new 15-year benchmark bond early next year, debt agency head Maria Cannata told Il Messaggero in an interview yesterday. Italy probably won’t need to request euro-area support to bring down its yields, she said.

“There is still the possibility of more turbulence and I’m not saying that everything is over, but the market is capable of distinguishing,” Cannata told the daily.

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