Italy Rates Poised to Rise in Auction Amid Vote Concern

Italy will test markets today with the sale of long-term debt after borrowing costs rose to the highest in four months yesterday as inconclusive elections triggered renewed concern Europe’s debt crisis may deepen.

This week’s vote produced a hung parliament, with comedian Beppe Grillo’s anti-austerity movement winning more than 25 percent of the popular vote, creating the risk of another election later this year. The outcome raises the chance for prolonged uncertainty, putting Italy’s sovereign credit rating at risk for a downgrade, Moody’s Investors Service said today.

Italy will seek to sell as much as 4 billion euros ($5 billion) of a new 10-year bond today and 2.5 billion euros of a 5-year benchmark note.

“The auction comes in a very challenging environment,” Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London, wrote in a note. Italy’s 10-year yield yesterday climbed 40 basis points, or 0.4 percentage point, to 4.89 percent, after rising as much as 44 basis points, the biggest increase since Dec. 19, 2011. The yield rose 4 basis points today to 4.94 percent at 8:34 a.m. Rome time.

Softer Demand

Today’s auction comes after the Rome-based Treasury yesterday sold six-month bills at the highest rate since October. “Demand is expected to be softer than in the previous months, despite increasing yields,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said by e-mail. “Risks for Italian yields are skewed to the upside, especially at the long end of the curve.”

The surprising outcome of the vote may force Italy’s President Giorgio Napolitano to call new elections if the coalition led by Democratic Party leader Pier Luigi Bersani, who won the Chamber of Deputies by a thin margin, fails to form a government.

“A minority government or an unstable government until there are new elections a few months from now means that investors might short Italian debt, spreads may keep rising and the shield that’s supposed to be there isn’t there,” Nouriel Roubini, the New York University professor who predicted the 2008 financial crisis, said in an interview at a Doverie conference in the Bulgarian capital of Sofia. “That could create a vicious circle.”

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