July 14, 2011

Italian Bond Rate Jumps at Auction

Tough market demands record yields

In its latest bond auction on Thursday, Italy found itself paying the highest interest rates in three years to unload long-term debt. Investors demanded yields of 4.93% for five-year bonds and 5.9% for 15-year bonds.

The  country managed to sell 4.97 billion euros ($7 billion) in bonds. Its target was 5 billion euros, indicating that investors are still willing to take a chance on Italy's bonds even if they do demand higher returns for doing so.

Reuters reported that analysts said the yield levels were unsustainable in the long term. Kathleen Brooks, research director UK EMEA at Forex.com, was quoted saying, "While the auction will most likely be spun as a success, there are some worrying signs and Italy won't be able to continue to have debt auctions like this indefinitely." Italy's debt load amounts to 120% of GDP and within the euro zone, only Greece carries a bigger burden.

After the sale, the Italian stock markets fell, and the premium on 10-year bonds over German Bunds rose higher than 300 basis points; before the sale it had been approximately 294 basis points. On Tuesday, the spread had widened to 353 basis points, a euro lifetime high, before the Italian government took action to speed up approval of an austerity package amounting to 47 billion euros.

However, before Friday's selloff, the spread had only been 220 basis points. David Schnautz, a rate strategist at Commerzbank in London, was quoted saying, "A look at the outright yield levels is eye-watering."

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