Italy Pays Record Low at Biggest Bond Auction Since 2011

Italy’s borrowing costs dropped to a record low at an auction of three-year debt as confidence returns to peripheral euro-area countries amid expectations of an economic recovery.

Italy sold a total 8.2 billion euros ($11.2 billion), the biggest bond auction since May 30, 2011 and near the 8.25 billion euros that was the maximum target for the sale. The country sold 4 billion euros of a new three-year note maturing in December 2016 at a record low 1.51 percent, down from 1.79 percent at the previous auction Nov. 13.

“Today’s BTPs auction was smoothly absorbed but the recent out-performance of the Italian debt” compared with the debt of core countries in the euro area might have somehow capped demand, Annalisa Piazza, senior fixed-income strategist at Newedge Group in London, wrote in an e-mailed note.

Investors bid for 1.38 percent the amount of the 2016 debt sold, down from 1.80 at the previous sale of similar-maturity debt Nov. 13.

Spanish, Italian and Portuguese bonds outperformed their higher-rated peers last week as signs the region’s economy is recovering fueled optimism the worst of the debt crisis is over. The European Central Bank’s pledge to keep interest rates low as long as necessary is also keeping Italy’s 10-year yields below 4 percent, compared with more than 7 percent in 2011.

’Weak’ Argument

When on Jan. 3 the yield spread between Italy’s 10-year bonds and their German equivalent fell below 200 basis points for the first time since July 2011, Italian Finance Minister Fabrizio Saccomanni cited the market gains as confirmation the government had adopted the right policies.

The reform theme is ’’very weak,’’ Mario Spreafico, Chief Investment Officer Schroders Wealth Management for Italy, said by phone. “What’s happening to the spread now is that the European situation has notably improved, there are signs of an economic recovery and the European Central Bank’s action in the last year and a half has prevented any kind of substantial crisis.”

At today’s auction the Rome-based Treasury also sold about 1.7 billion euros of 2028 bonds at 4.26 percent, compared with 4.59 percent when it last sold the bond Oct. 11. In addition, Italy sold 2.5 billion euros of a seven-year note to yield 3.17 percent.

Investors bid for 1.38 times the amount of the 2021 debt sold and for 1.29 that of the 2028 bonds, compared with 1.59 at the previous auction of 15-year debt Oct. 11.

2014 Commitment

Italian Prime Minister Enrico Letta is holding talks with political leaders for a new coalition pact due to be presented by the end of the month that should define the priorities for this year and include an overhaul of Italy’s widely criticized election law and rigid labor rules.

Matteo Renzi, elected General Secretary of Letta’s Democratic Party last month, has pushed for a simpler labor market, with reduced costs for companies, easier firing rules and more protection for workers who lose their jobs.

“The parliament’s agenda is already full and it remains to be seen whether Renzi will succeed in reigniting the reform process,” Wolfango Piccoli, an analyst with Teneo Intelligence, said by e-mail before today’s debt sale.

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