Italian borrowing costs fall despite downgrade

ITALIAN BORROWING costs fell yesterday even after a downgrade by Moody’s, as strong demand in a €6 billion government bond auction boosted sentiment.

Italy was downgraded one notch by the rating agency, to A3, six notches below the highest AAA rating.

Yet the country sold €4 billion of benchmark securities due in November 2014 at a yield of 3.41 per cent, down from 4.83 per cent at the last auction of similar-maturity bonds on January 13th and the lowest since last March.

The bid to cover ratio was 1.4 times.

Italy also sold a total of €2 billion of bonds due in 2015 and 2017.

The Netherlands sold five-year notes yesterday and Spain, Greece and Belgium auctioned bills.

The sales bring Italian issuance this year to €35.4 billion, meaning that the country has already refinanced more than a third of the €90 billion of maturing bonds it must repay or roll over between February and the end of April.

Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said: “Moody’s downgrading the country was really not a factor that went against it because it probably was already priced in and people are still thinking that the government is going to make the right reforms to put the country into potential growth and a better situation.”

“The Italian auction in particular went very well,” said John Davies, a fixed-income strategist at WestLB in London.

“The auctions . . . went very smoothly given what we’d seen from Moody’s. These and this Zew survey have contributed well to risk appetite overall.”

The Zew survey of German investor confidence surged to a 10-month high in February.

In the secondary markets, Italian 10-year yields fell further to 5.57 per cent, a sharp drop in the space of a month.

These yields stood at 7.16 per cent on January 9th.

Goldman Sachs said it had stopped recommending Italian 10-year bonds over their French counterparts after the yield difference narrowed toward the bank’s 250-basis point target.

Spain underperformed Italy as it was downgraded two notches, also to A3.

Portugal was cut to Ba3 from Ba2, with a negative outlook.

Spanish 10-year yields jumped to 5.28 per cent. Spanish yields have also fallen in recent weeks, but not as steeply as Italian borrowing costs.

Spanish yields stood at 5.7 per cent on January 6th.

Moody’s also lowered the ratings of Slovakia, Slovenia and Malta.

“Policymakers have made steps forward but we do not think they have done enough to reassure the market that we are on a stable path,” said Alistair Wilson, chief credit officer for Europe at Moody’s in London.

The extra yield investors get to hold Italian 10-year bonds instead of Spanish securities, which fell six basis points to 28 basis points, the least since November 22nd, based on closing market rates.

Greek two-year notes slumped as the Athens-based Hellenic Statistical Authority said gross domestic product dropped 7 per cent from a year earlier in the fourth quarter after contracting a revised 5 per cent on an annual basis in the third quarter.

The two-year note yield jumped almost 24 percentage points to 207.38 per cent, with the price on the securities dropping to 19.47 per cent of face value. – (Copyright The Financial Times Limited 2012)