Tags: Italy | Borrowing | Costs | debt

Italian Borrowing Costs Jump at Bond Sale on Crisis Concerns

Thursday, 12 April 2012 07:20 AM

Italy was forced to pay about 1.1 percentage point more than a month ago to sell three-year debt as concern about Spain’s budget deficit reignites the euro area’s debt crisis.

The Treasury sold 2.88 billion euros ($3.78 billion) of a 3-year benchmark bond to yield 3.89 percent, which was less than a maximum target of 3 billion euros and up from 2.76 percent at the previous auction on March 14. Investors bid for 1.43 times the amount offered, down from 1.56 times last month. The Rome- based Treasury also sold 2 billion euros of bonds due in 2015, 2020 and 2023. The auction’s top target was 5 billion euros.

The Treasury didn’t allocate all bonds because “it didn’t need funding at an unfavorable yield,” Deputy Finance Minister Vittorio Grilli told reporters in Milan after the auction. The yields “reflect current market sentiment,” he said.

Italian bonds have declined for the past four weeks after Spain’s March 2 announcement that it wouldn’t meet its 2012 deficit goal fueled bailout concerns and eroded confidence in the debt of so-called peripheral countries. The month-long slump has reversed some of the gains in Italian bonds prompted by Prime Minister Mario Monti’s efforts to spur the economy and the European Central Bank’s unlimited three-year lending operations.

“Spain and Italy are the twin bellwethers of the euro-zone crisis,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail after the auction. “When one of them catches a cold, the other one sneezes. It’s the similarities between Spain and Italy that concern investors”.

‘Spanish Contagion’

“A good part of the current turbulence” in debt markets “is due to Spanish contagion,” Maria Cannata, head of Italy’s debt agency, told reporters in Rome yesterday.

The yield on Italy’s 10-year bond was down 9 basis points to 5.45 percent after the auction at 12:41 p.m. in Rome, pushing the difference with similar-maturity German debt to 364 basis points. Spanish bonds have fared worse, with 10-year rates climbing about 1 percentage point to 5.86 percent since Prime Minister Mariano Rajoy told European Union allies on March 2 the nation couldn’t meet its deficit goal for this year. Spain is now pledging a shortfall of 5.3 percent of gross domestic product, compared with an original commitment of 4.4 percent.

Spanish Selloff

Today marked the first Italian bond auction since Spain sold 2.6 billion euros of bonds on April 4, near the minimum planned, triggering a selloff that pushed Spain’s 10-year yield on April 10 to the highest close since January, with the Italian 10-year yield rising to the most in almost 2 months.

The decline in both countries’ bonds also reflects the fading effect of the ECB’s three-year loans.

The ECB lent more than 1 trillion euros in three-year loans to euro-area banks in December and February. Coupled with the ECB buying bonds, that support prompted purchases of more than 250 billion euros of Spanish and Italian government securities between the third quarter of 2011 and the first quarter of this year, according to Credit Agricole SA. That’s more than the 216 billion euros of debt the two nations sold in the same period.

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Thursday, 12 April 2012 07:20 AM
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