December 29, 2011

ECB Steps In After Italy Bond Sale

Yields fall, but rate still high in thin market

The ECB stepped in to buy Italian bonds after a slow auction. (Photo: AP) The ECB stepped in to buy Italian bonds after a slow auction. (Photo: AP)

Italy sold bonds on Thursday, but not as many as hoped in thin trading. While yields fell, they were still not far from euro-lifetime highs as investors displayed concern over the country's ability to sustain itself. After the auction, the European Central Bank stepped in to purchase Italy's bonds on the open market.

Reuters reported that while short-term yields were down, longer-term bonds still commanded a high return at levels seen as unsustainable over the long term. Although Italy only sold enough overall–a total of 7 billion euros ($9 billion)–to make the midpoint of its target range, yield demanded for its benchmark 10-year bonds was at 6.98%, only down a little from the euro-lifetime high of 7.56% last month. However, it was able to sell the top amount it had planned of 10-year bonds at that level.

Three-year BTP bonds did better for the country with regard to expense; their yields dropped more substantially to 5.62% from an end-of-November euro-era record of 7.89%. During that November auction, concerns were so high about Italy's ability to repay that three-year yields topped longer-term bonds.

David Schnautz, a rate strategist at Commerzbank in London, was quoted saying of the Thursday auction, "Today's decline in the auction yield by 'just' about 60 basis points versus end November in such a high-yield territory underscores that the genuine pressure on Italy is still tremendous, despite bold ECB actions that have given [short-term debt] a big boost."

The ECB stepped in after the auction concluded, since Italian 10-year yields stayed firmly above 7% percent on the secondary market. It has already sunk nearly half a trillion euros in cheap bank loans into the market. About 91 billion euros in Italian bonds will come due between January and April of 2012.

Nicholas Spiro of Spiro Sovereign Strategy was quoted saying, "Given the scale of its funding requirements, there are still big concerns about Italy's ability to get through 2012. Next quarter is going to be all about Italy."

Italy's treasury needs to fund a gross amount of about 450 billion euros for 2012. While shorter-term bonds are generally well supported by domestic retail investors, longer-term debt usually goes to foreign investors; the sale offered a clear indication of how foreign buyers regard the quality of Italy's debt.

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