Italy Borrowing Costs Decline at Bond Auction Amid Optimism

Italy’s borrowing costs declined at a bond auction today as investors continued to look for higher returns amid expectations of further monetary easing.

Italy sold 3.5 billion euros ($4.54 billion) of 2.25 percent 2016 bonds at 1.92 percent compared with 2.29 percent at the last auction April 11 and the lowest since a sale of comparable bonds on Jan. 11. Investors bid 1.34 times the amount of the three-year bond offered, down from 1.40 times last month.

“Demand was relatively good, supported by still good liquidity conditions that encourage carry trades on the Italian debt,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in an e-mail after the sale.

European Central Bank President Mario Draghi said last week policy makers are ready to cut interest rates again if needed after reducing them to a record low May 2. Finance Minister Fabrizio Saccomanni has said the government won’t need additional budget cuts and remains committed to holding the Italian deficit to less than 3 percent of gross domestic product.

The Rome-based Treasury also sold longer-term debt, placing 1.5 billion euros of 4.5% 2026 bonds and 3 billion euros of a new floating-rate 2018 bond to yield respectively 4.07 percent and 2.44 percent. Altogether, Italy sold 8 billion euros of debt, the maximum target for the auction.

Italy’s 10-year bond yield rose 6.3 basis points to 3.956 percent after the sale at 3:04 p.m. in Rome, pushing the difference with comparable German bunds to 259.7 basis points. Benchmark 10-year yields in Italy, Europe’s biggest bond market, on May 3 dropped to the lowest level since February 2006.

Record-low Yields

“If you weight the country’s fundamentals against the current yields at historical low levels, it’s difficult to think that there will be more room for further tightening of the spread,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London.

Today’s auction comes as members of Prime Minister Enrico Letta’s government meet in Tuscany at an informal retreat to set the direction of new leadership. After two months of political impasse, Italy may pass this week measures to suspend the June payment of the tax on primary residences and finance jobless benefits as unemployment remains near a 20-year high.

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