Italy Yields Decline at Sale as German Notes Fetch Negative Rate

Italy’s Borrowing Costs Drop to Two-Year Low at Bond Auction
Foreign investors have been returning to the Italian debt market in recent months after European Central Bank President Mario Draghi pledged to do whatever it takes to defend the euro and then announced a program to buy bonds of countries struggling to bring down borrowing costs. Photographer: Alessia Pierdomenico/Bloomberg

Italy sold 3.5 billion euros ($4.46 billion) of three-year notes at the lowest rate in more than two years and the Treasury tapped growing demand for the country’s debt to auction longer-dated securities.

The nation attracted bids for 1.5 billion euros of bonds due in 2023 and 2029, its first sale of debt due in more the 15 years since May 2011. The German government sold two-year notes at a negative yield for only the second time on record.

Italy’s 10-year bond yield has fallen more than 160 basis since European Central Bank President Mario Draghi pledged on July 26 to do whatever it takes to defend the euro. That was followed by a vow to buy bonds of countries struggling to bring down borrowing costs. Even with the gains, Italy pays almost 3.6 percentage points more than Germany to borrow for 10 years.

“The resilience of Italian debt to the recent deterioration in market sentiment is quite remarkable and stems entirely from the signaling effect of the ECB’s new bond-buying program,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “This is the longest period of relative calm in Italy’s bond market since the crisis erupted in July 2011” in the nation, he said.

German Auction

The Rome-based Treasury sold 3.5 billion euros of its benchmark three-year note to yield 2.64 percent, the lowest since October 2010 and less than the 2.86 percent at the last auction on Oct. 11. Germany auctioned 4.3 billion euros of the two-year debt at an average yield of minus 0.02 percent, down from 0.07 percent when similar-maturity debt was offered on Oct. 17. Italy’s two-year debt yields 2.30 percent.

Today’s bond and note sales were the first by the two nations since European finance ministers this week agreed to give Greece an extra two years to meet its deficit targets, without agreeing on how to finance the resulting budget shortfall. Neither did ministers comment on whether Spain would seek to trigger ECB bond purchases as the nation’s 10-year yield hovers doggedly near 6 percent.

The German auction result underlines investors’ “nervousness and search for safety amid risks that persist from Greece’s unresolved troubles and the impending fiscal cliff in the U.S.,” finance agency spokesman Joerg Mueller said in an interview after the auction. The so-called fiscal cliff refers to a combined $607 billion of tax increases and spending cuts that will begin automatically in January without a change to U.S. legislation.

Italy’s 10-year bond yield fell two basis points, or 0.02 percentage point, to 4.94 percent at 2:50 p.m. London time, leaving the difference with comparable maturity German bunds at 358 basis points. The German 10-year yield rose two basis points to 1.36 percent. Italian benchmark 10-year yields reached 6.71 percent on July 25, before Draghi’s announcement.

“Investors’ perception of Italy has changed a lot,” Mario Spreafico, chief investment officer at Schroders Private Banking in Milan, said by phone after the auction. “The spread between Italian bonds and German bunds is still unjustified considering our fundamentals. It should be at least lower than 300 basis points.”

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