Italian Yields Decline as Investors Shrug Off Political Crisis

Italian borrowing costs dropped at an auction of 7.17 billion euros ($9.38 billion) of bonds today as investors shrug off risks tied to the country’s political crisis.

Italy sold 4 billion euros of a new 2.25% 2016 bond at 2.29 percent, down from the 2.48 percent on similar maturing debt March 13. Investors bid 1.40 times the amount of the new three-year bond offered, up from 1.28 times last month.

The Rome-based treasury also sold longer-term debt, placing 1.67 billion euros of 4.75% 2028 bonds and 1.5 billion euros of floating-rate 2017 bonds to yield respectively 4.68 percent and 2.74 percent. Italy sold a total of 7.17 billion euros of debt, near the 7.5 billion-euro maximum target.

“The auction was smoothly absorbed,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said by e-mail after the auction. “That said, markets are currently not pricing in domestic risks on the political side.”

Italy’s February election failed to produce a parliamentary majority, leaving Prime Minister Mario Monti as a caretaker until a new administration can be formed. Monti said yesterday Italy’s debt will reach a post-war record of 130.4 percent this year as the euro region’s third-biggest economy borrows to help contribute to bailouts and pay arrears to government suppliers.

Budget Deficit

Monti said undoing his economic policy would be a mistake and the country’s improved credibility “can be undermined quickly.” The government managed to keep its budget deficit within the EU’s limit of 3 percent of GDP, easing some of the concern over the debt level.

Even if the rise of the debt-to-GDP ratio may be a concern for markets, “the increase in the debt does not reflect a genuine deterioration of the fiscal stance and should not come as a surprise,” Loredana Federico, a Milan-based economist for UniCredit SpA, wrote in a note this week.

Italy sold one-year bills yesterday at the lowest rate since January and paid a record low yield to place three-month debt. Today’s sale was probably helped by 16.7 billion euros of bond redemptions due on April 15.

Italian government bonds stayed little changed after the sale, with the yield on the benchmark 10-year bond at 4.31 percent.

Presidential Choice

While Italy awaits a new government, talks between political parties are focusing on the election of the successor to Italian President Giorgio Napolitano. Parliamentary voting for the presidency starts as soon as April 18.

A possible compromise on Napolitano’s successor between former Prime Minister Silvio Berlusconi’s People of Liberty Party and Pier Luigi Bersani’s Democratic Party may be the first step in forging a coalition government.

Bersani won a majority in the Chamber of Deputies in the Feb. 24-25 vote, while falling short in the Senate, where Berlusconi has a blocking minority.