Italy Sells Bonds as Borrowing Costs Hold Near Two-Year Low

Caretaker Prime Minister Mario Monti
Today’s auction, the first sale of medium-to-long term debt to fund 2013, is the second market test for Italy since caretaker Prime Minister Mario Monti announced on Dec. 23 that he would consider being the premier candidate for a coalition backing his economic agenda in the Feb. 24-25 election. Photographer: Alessia Pierdomenico/Bloomberg

Italy sold 5.9 billion euros ($7.8 billion) of bonds today with rates holding near the lowest in two years amid optimism caretaker Prime Minister Mario Monti will play a role in the next government.

The Treasury in Rome today sold 3 billion euros of 10-year debt at 4.48 percent, up from 4.45 percent at the previous auction on Nov. 29, which was the lowest since November 2010. The Treasury also sold 2.9 billion euros of bonds due in 2017 to yield 3.26 percent compared with 3.23 percent Nov. 29.

Today’s auction, the first sale of medium- long-term debt to be settled in 2013, is the second market test for Italy since Monti announced Dec. 23 that he would consider being the premier candidate for a coalition backing his economic agenda in the Feb. 24-25 election. The Treasury sold 8.5 billion euros of bills yesterday.

“Many investors are taking the view that the transformation of Italian premier Mario Monti from technocrat to politician will ensure post-election stability,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail after the sale. “The ’Monti effect’ is now vying with the ’Draghi effect’ in underpinning Italy’s bond market”.

European Central Bank President Mario Draghi’s pledge in July to do “whatever it takes” to defend the euro has proven an effective backstop for Italy’s borrowing costs. Draghi followed that in September with the outline of a plan to buy bonds of nations struggling to bring down borrowing costs.

Stable Majority

Polls suggest Pier Luigi Bersani, the center-left candidate for premier and the front-runner to succeed Monti, may struggle to get a majority in the Italian Senate unless he seeks an alliance with parties backing Monti’s agenda.

This is “is a very likely outcome that could increase the chances to have a pro-Europe and reforms-oriented bloc in the next government,” Silvio Peruzzo, an economist at Nomura International in London, said by e-mail before the sale.

Monti will meet today in Rome with Economic Development Minister Corrado Passera, International Cooperation Minister Andrea Riccardi and Pier Ferdinando Casini, who are among his biggest supporters, newspaper la Repubblica reported.

Bersani, a former communist whose leadership in the Democratic Party is grounded in support from Italy’s biggest union, has pledged to respect the budget commitments taken with the European Union while promising to do more to support pensioners and workers. His party supports some of the measures included in Monti’s political road map, he said Dec. 26.

Rising Uncertainty

While markets are not putting pressure on Italy, uncertainty about the election outcome may increase the country’s borrowing costs going forward.

“Much will then depend on the possibility of forming a stable government, committed not only to following in Monti’s steps in terms of budget discipline and reform, but also to increasing actions in support of growth,” Intesa Sanpaolo SpA said in its 2013 economic outlook published yesterday.

Italy’s 10-year yield was down 1 basis point to 4.5 percent at 12:10 p.m. in Rome, leaving the difference with comparable-maturity German debt at 321.6 basis points.

A rise in borrowing costs, even temporarily, would have an immediate impact on Italy, which needs to sell an average of more than 30 billion euros of bonds and bills a month to finance the euro-region’s second-biggest debt, currently at more than 126 percent of gross domestic product.

At today’s auction investors bid for 1.47 times the amount of the 10-year debt offered, up from 1.18 times Nov. 29, and for 1.29 the amount of the five-year compared with 1.24 last month.

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