Successful Italian Bond Auction Cuts Short-Term Debt Costs By Half

By: EW News Desk Team   Date: 29 December 2011

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29 December 2011

Italy’s short-term debt costs fell by half on Wednesday, after the country managed to raise 9 billion euros from 6-month bonds at an average yield of 3.25 percent, compared to the euro-era record of 6.5 percent set last month.

At the same time, the Italian Treasury also managed to raised 1.733 billion euros from zero coupon bonds due in 2013 at a rate of 4.853 percent, down from 7.814 percent last month.

"This is the first piece of good news for Italy's bond market since the crisis erupted (for Rome) in July," said Nicholas Spiro of Spiro Sovereign Strategy in an interview with Reuters.

"While today's auction was supposed to be the less challenging of this week's two sales given the shorter maturity of the debt on offer and the predominantly domestic buyer base, it's still a success."

The successful auction provided a glimmer of hope for the austerity-bound country, which will face a sterner test today, when it attempts to sell up to 8.5 billion euros in longer-term bonds, including 3 and 10-year papers.

"Demand for short term paper is good. It remains to be seen whether this extends to the longer maturities," said Credit Agricole strategist Peter Chatwell.

Last month, Italy paid a record high yield of 7.56 percent in order to sell 10-year bonds, with the tensions surrounding the eurozone crisis back then seen as the primary cause for the high yield rate.

Since then however, the European Central Bank has flooded euro zone banks with almost 500 billion euros worth of longer-term liquidity, while the Italian government’s recently released austerity package could be seen as the key reasons for the increased optimism in the market. 

The recent sale could be "a sign that market tensions have considerably eased from a month ago and that European Central Bank liquidity may be working to support demand," said Luca Cazzulani, a strategist at Italian banking giant UniCredit, to AFP.

Still, Alan Ruskin, a currency strategist at Deutsche Bank, cautioned against reading too much into the recent Italian sale as well as for the upcoming long-term bond sale. 

“So often you have had these misleading signals early in the year, so you have to be cautious,” said Ruskin, in an interview with the Financial Times

“It is less about auctions, it is more about the markets having something to latch on to in terms of reforms,” he added.


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