Italian 3-Year Borrowing Costs Surge at Auction
Italian three-year borrowing costs jumped to 3.89 percent at a bond auction on Thursday, a rise of more than one percentage point compared with a month ago and the latest sign markets are unconvinced that Europe is on top of its debt problems.
Budget troubles in Spain and concerns about slowing global growth have turned the spotlight back on Italy's 1.9 trillion euro debt and a bond rally driven by a liquidity injection by the European Central Bank has given way to profit-taking.
The 3.89 percent Italy paid to sell its three-year March 2015 bond compared with 2.76 percent in mid-March. A day earlier, Italy's one-year borrowing costs doubled in an auction.
"The funding environment is getting tougher for the periphery. Overall we believe the spreads are biased towards further widening although we still prefer Italian debt over Spanish," said Michael Leister, a strategist at DZ Bank.
Thursday's increase brings three-year auction yields to their highest level since mid-January.
In a more reassuring sign, however, the Treasury raised 4.88 billion euros at the sale - just shy of its maximum planned amount of 5 billion euros.
Italy's 10-year yield gap against Germany tightened slightly after the auction to 379 basis points, from 384 basis points ahead of publication of the results.
"It sold nearly the top amount, this is undoubtedly positive," said ING strategist Alessandro Giansanti.
Italian officials have blamed external factors - an oblique reference to Spain - for the rise in yields and dismissed suggestions the slow progress of structural reform, including new labour rules, have put off investors.
Thursday's auction was seen benefiting from reinvestment flows from 15 billion euros of Italian BTP, or fixed-rate, bonds maturing mid-April.
Italy also sold three off-the-run bonds due in 2015, 2020 and 2023. It was the first time since last October Italy issued a bond with a maturity longer than 10 years. Traders said these lines had been specifically requested by primary dealers.
The Treasury sold the maximum planned amount of 2 billion euros for the three lines, and the sale was more than twice covered.
The Treasury has repeatedly said it wants a lasting improvement in market conditions before it starts issuing longer term debt again. Such bonds have benefited less than shorter-maturities from the ECB's liquidity largesse.
Prior to Thursday's sale, Italian three-year borrowing costs had been declining after hitting a euro lifetime record of 7.9 percent in November.
Rome has struggled, however, to regain lasting market confidence under a new government led by economist Mario Monti, with key help coming from the ECB's longer-term loans, which have funded Italian banks' purchases of government bonds.
With investors fearing the debt crisis could worsen again, Italian banks' exposure to sovereign risks has returned as a source of concern.
The yield premium Italian 10-year bonds pay over German Bunds rose above 400 basis points on Tuesday, for the first time since early February. That compared with a level of around 570 basis points at the height of the euro zone crisis last November.
With a healthier banking system and a less indebted private sector, Italy is seen on a sounder footing than Spain but lags behind Madrid in its yearly funding plans.
It has completed so far only 37 percent of an estimated bond issuance plan of 215 billion euros for 2012, while Spain has reached almost half its 2012 goal.