Italy sold nearly €8 billion of government bonds today in a keenly awaited auction that, despite recent ECB support, met relatively weak demand and threatened to re-ignite market pressure on the highly indebted country.
Lower-than-expected demand at the auction - seen as a key test of emergency steps taken to control the euro zone debt crisis - pushed Italian bond yields higher and sparked a rally in safe-haven German debt.
The rise in yields, which nonetheless stayed well below levels hit before the European Central Bank began buying Italian debt three weeks ago, raised questions about the sustainability of Rome's funding efforts and threw the focus on to a Spanish bond auction on Thursday.
Traders said the ECB stepped in after the auction to buy significant amounts of 10-year Italian debt, halting the rise.
"The results look a bit worse than the market was expecting, with the 10-year looking weak with a rather small bid cover ratio," said Credit Agricole rate strategist Peter Chatwell. "The market is likely to lose a bit of confidence from this auction until 10-year Italy stabilises, which is in the ECB's hands."
The launch of a new 10-year benchmark bond drew bids worth 1.27 times the €3.75 billion sold, below the year's average bid-cover ratio on equivalent auctions of 1.4.
The ECB began buying Italian debt on the secondary market earlier this month in an unprecedented step to counter rising yields caused by investor concerns over the country's high debt levels and stuttering fiscal reforms.
The intervention brought benchmark 10-year yields down from levels well above 6 per cent, seen as unsustainable, to around 5 per cent. The current 10-year benchmark yielded around 5.14 per cent in the cash market, up around 5 bps on the day.
The new 10-year bond sold at a yield of 5.22 per cent, broadly in line with grey market prices ahead of the sale. That yield compared to 5.77 per cent at an auction of the previous 10-year bond in July, before the ECB's intervention.
The auction will do little to allieviate the market's central fear that Italy, seen as too big to be bailed out, will not be able to issue bonds at an affordable level to finance its huge €1.9 trillion debt burden.
Italy must still sell up to €90 billion in bonds this year and ECB purchases have been steadily decreasing.
"The ECB support was clearly crucial. Without the ECB intervention a couple of weeks ago yields would not be trading at this 5 per cent level so it might have easily been a full percentage point more," said Michael Leister, strategist at WestLB in London. "The fact that yields remained relatively stable last Friday and more importantly this morning shows indeed that the ECB was successful in stabilising them but the big question is what happens going further."
The ECB has bought around €43 billion worth of debt since it reactivated its bond buying programme earlier this month, with market participants saying ECB buying has focused on Italy.
Reuters
