Talk of ECB action keeps Italy bond yields low at auction

Italy's funding costs remained close to multi-year lows at a bond auction, as speculation the European Central Bank may start an asset purchase programme supported demand for higher-yielding debt.

The sale of zero-coupon and inflation-linked bonds raised the maximum planned amount of €5 billion. Taking advantage of strong market appetite for debt from weaker euro zone countries this year, Italy has already completed almost 40 per cent of its annual issuance plan.

On Thursday, the Treasury sold €3.5 billion of a new zero-coupon certificate maturing in April 2016 at a yield of 0.786 per cent, drawing demand for 1.5 times the amount sold.

A bond of the same type due in December 2015 and sold by Italy at the end of March attracted similar demand and fetched an average 0.707 per cent yield, a euro lifetime low.

ECB president Mario Draghi today reiterated that the central bank could start buying assets, a policy measure known as quantitative easing, if the outlook for inflation in the euro zone worsened. He said a rise in the euro's exchange rate could also trigger policy action.

“Quantitative easing would likely raise medium-term inflation expectations, lower real yields and be particularly supportive for higher yielding markets, like Italy,” analysts at Citi said in a note.

The Treasury also sold around €1 billion of a 10-year inflation-linked bond first issued in March through a syndicate of banks. The yield fell to 1.92 per cent from 2.39 per cent and demand totalled 1.8 times the amount placed.

A new tranche of a 15-year linker due in 2026 was sold at an average 2.09 percent yield and attracted bids worth nearly 2.5 times the €525 million sold.

Italy will offer up to €9 billion in bonds next week, including new tranches of its 5 and 10-year benchmarks. (Reuters)