Italy’s Record-Low Yield Shows Greek Woes Contained

Forget the PIIGS. These days Greece is on its own.

As Italy sold 10-year bonds today at a record-low yield of less than 2 percent, rates on similar-maturity Greek debt were spiraling toward 10 percent. Compare that with 2011, when Greece’s troubles were grouped with Portugal, Ireland, Italy and Spain and Italian borrowing costs exceeded 7 percent.

Euro-area government bonds are rounding out their best year since 1995 as slowing growth and inflation prompt the European Central Bank to respond with unprecedented stimulus efforts. Its action is helping to prevent the selloff spreading from Greece, which faces snap elections next month.

“Greece is no longer the existential threat that it once posed,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “You can isolate a country without there being a huge wave of contagion.”

A glance at this year’s returns on the region’s sovereign debt confirms as much. Greek securities were the worst performers, eking out a 0.4 percent gain. Portugal’s, the best, earned almost 22 percent, and those from Spain, Italy and Ireland all posted returns of more than 13 percent, according to Bloomberg World Bond Indexes.

Record Yields

While growth in the euro area remains subdued, the lower yields on bonds are a boon for the region’s governments. Italy sold almost 3 billion euros ($3.6 billion) of December 2024 securities today at an average yield of 1.89 percent, down from 2.08 percent at an auction on Nov. 27, according to data from the Bank of Italy in Rome. They’ll help replace debt paying interest of as much as 4.5 percent that matures next month.

The nation also sold five-year notes and floating-rate bonds today.

Italy’s 10-year yield dropped 10 basis points, or 0.1 percentage point, in the secondary market to 1.88 percent at 4:08 p.m. London time and touched 1.879 percent, the least since Bloomberg began collecting the data in 1993. The 2.5 percent bond due in December 2024 rose 0.92, or 9.20 euros per 1,000-euro face amount, to 105.65.

“The auctions clearly were very strong and they were particularly strong given the background of Greece and possible risk aversion,” SocGen’s O’Hagan said. “The ECB is certainly helping, but it’s also because the nature of the Greek problem has changed.”

ECB Stimulus

Data today showed Spanish consumer prices declined the most in more than five years this month, bolstering speculation on additional ECB measures, including buying government bonds.

Spain’s 10-year yield fell seven basis points to 1.60 percent and touched a record-low 1.586 percent. The nation’s annualized inflation rate declined 1.1 percent in December, the most since July 2009. Benchmark German 10-year bund yields declined to 0.535 percent today, the lowest since Bloomberg began compiling the data in 1989.

Greece’s 10-year yield rose five basis points to 9.59 percent. It reached 9.85 percent yesterday, the highest since September 2013. The three-year note yield jumped 131 basis points to 13.40 percent.

Greek Prime Minister Antonis Samaras failed yesterday to get a majority of lawmakers to elect his candidate for head of state. With the early elections likely to be on Jan. 25, a poll today put Greek anti-austerity party, Syriza, in the lead.

Past experience is adding to support for bonds from Italy and its peers.

Bailout Fund

When Greek bonds tumbled in early 2010, the European Union had no way of helping countries in need. And when Greece toyed with quitting the euro in late 2011, it had only a temporary bailout fund. Now, it has a full-time aid fund in the 500 billion-euro European Stability Mechanism. It also boasts success stories: Ireland, Portugal and Spain have been weaned off financial aid.

Europe’s bonds returned 13 percent this year, according to the Bank of America Merrill Lynch Euro Government Index. That’s the most since a 17 percent gain in 1995.

The PIIGS nickname grew popular in 2010 as investors dumped assets in the euro region’s smaller economies on concern the countries would struggle to control their budget deficits.

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