Italy Borrowing Costs Rise at Sale of Zero Coupon Notes

Italian borrowing costs rose at a sale of zero-coupon notes after Italian lenders showed the largest combined capital shortfall in the European Central Bank’s stress tests.

“The recent surge in market tensions has weighed on the periphery, also at the short end,” UniCredit fixed income strategist Elia Lattuga wrote in a note to clients yesterday.

Italy sold a total of 3.5 billion euros ($4.4 billion) of debt, matching the maximum target for the sale, with the yield on an August 2016 zero-coupon note at 0.692 percent compared with 0.385 percent on Sept. 25.

The yield on Italian 10-year bonds was little changed at 2.55 percent at 11:39 a.m. Rome time.

Investors bid for 1.71 times the amount of the 2016 zero-coupon notes sold compared with 1.73 last month. Italy also sold a total of 1 billion euros of inflation-linked bonds due in 2024 and 2026 at 1.43 percent and 1.68 percent respectively.

Italian banks showed the largest combined capital shortfall in the ECB’s review of Europe’s lenders as the country is struggling to emerge from a three-year economic slump. Of the nine Italian banks that failed a stress test, four still showed holes after measures they took this year, according to the ECB’s report.

“It is important to understand that the AQR was not only an assessment of Italy’s banks, but also, indirectly, of Italy’s sovereign debt,” Francesco Galietti, founder of researcher Policy Sonar in Rome, said in a note to clients before today’s debt sale. “This should not be a surprise, given the huge exposure of domestic banks to Italy’s sovereign debt.”

The Rome-based Treasury returns to the market tomorrow with the sale of 6.5 billion euros of 181-day bills.

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