Italy Sells €4.884 Billion In Bonds, Just Shy Of High Target As Yields Climb
Submitted by Tyler Durden on 04/12/2012 07:03 -0400
All eyes were on Europe again today, where Italy sold debt for the second day in a row, only this time instead of 1 year and lower Bills, the Tesoro came to market with On and Off the run issuance maturing in 3 through 11 years. And as was to be expected, with a substantial portion of the debt maturing after the LTRO 3 year window, the auction was mixed, far weaker than yesterday's LTRO-covered Bill issuance, and the maximum target of €5 billion was not met, instead a total of €4.884 billion was sold. Furthermore yields surged compared to previous auctions. "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.What is most worrying is that the funding picture is again deteriorating rapidly, although not as fast as in Spain, even as LTRO cash is still sloshing around European banks. What happens when it runs out?
A breakdown of the various auction tranches:
On the run:
- €2.884Bn of 2.5% BTP due 2015, yield 3.89 % up from 2.76% previously, Bid To Cover down to 1.435 from 1.565 previously; targeted €2-3 Billion
- Off The Run:
And despite the auction being largely in line if on the weak side, Italian yield spreads have tightened by a few basis points following.Some more commentary from Reuters: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.
- €395MM of 3% BTP due 2015, yield 3.92 % up from 3.77% prior, Bid To Cover 3.26% from 2.37%
- €687MM of 4.5% BTP due 2020, yield 5.04% vs 4.3% prior , Bid To Cover 2.195 vs 2.00 previously
- €918MM of 4.75% BTP due 2023, yield 5.57% vs 5.24% prior, cover 1.75 compared to 1.65% previously
and from the live blog....
11.19 Ranvir Singh, CEO of market analysts RANsquawk, offers his verdict on the auction:
If this auction failed to inject some much-needed confidence into the Eurozone, it should at least give Italy a stay of execution while it tries to put its house in order.
But just how much longer can the likes of Spain and Italy avoid the debt default trap door? Italy is generally considered to be on a slightly sounder economic footing than Spain, but it's still in the ultra-high risk category. Rising yields, an economy in recession, political discord and tough austerity measures are a deadly combination that could push Italy over the edge.
The auction is a breather for the Italian Government, but only a short one.
11.08 Vittorio Grilli, Italy’s deputy finance minister, said the outcome of the auction was in line with expectations. He added that the Treasury decided not to step in to meet all the demand because there was "no urgency to fund ourselves at these rates."
Italy has an average debt maturity of just over seven years - among the longest in the EU. The UK's average debt maturity is 14 years. The longer the debt maturity, the easier it is to absorb any debt market shocks.
10.48 There's currently a debate on Twitter on how the auction fared. Some described it as "terrible," but were quickly censured, others said it was "not so good". This is probably a more accurate description from Dow Jones's Katie Martin:
By the way, I'm referring to "tepid," not "meh" (though in monosyllabic terms, it's not a bad description).
10.41 Italy's benchmark borrowing costs are steady after the auction. Yields on 10-year government bonds are currently down 6 basis points, at 5.441pc.
10.35 Right, we have the full results.
Italy sold €395m in a separate auction of three-year debt at average rates of 3.92pc, €687m of eight-year bills at average rates of 5.04pc, and €918m of 2023 bonds at average yields of 5.57pc. On average, there were 2.2 bidders per bond on offer.
In total, the country sold €4.88bn of its €5bn target - a sign of healthy demand, despite the higher rates.
10.23 Some of the Italian bond auction results are out. It looks like demand waned and interest rates increased.
The country sold three year debt at average yields of 3.89pc (compared with 2.76pc at the last auction). There were fewer bidders for each bond on offer - 1.435 - compared with 1.565 at the last auction.
10.12 It wouldn't be a debt crisis if we didn't mention Greece.
Unemployment in the stricken nation climbed to 21.8pc in January, from 20.9pc in December, according to Greece's statistics office EL.STAT. This means more than a million people are now out of work.
Youth unemployment in January stood at 50.8pc.
10.05 Industrial production across the eurozone ticked up 0.5pc in February on a monthly basis, beating market expectations of a 0.2pc contraction. However, January's output was revised down to zero (from 0.2pc).
Year-on-year, production contracted by 1.8pc, matching expectations, according to EU statistics office Eurostat.
09.55 Speaking on the sidelines, Mr Grilli also said that the debt crisis had not turned into a contest between Italy and Spain. He told Reuters:
We cannot talk about a derby between Italy and Spain.
09.51 It's a "long way before markets will find equilibrium,"Vittorio Grilli, Italy’s deputy finance minister, told reporters ahead of a cabinet meeting today.
Mr Grilli said that “markets are very nervous,” but added that he was not concerned about today's auction of long-term debt.
09.38 The UK's trade deficit widened in February as exports to countries outside the EU fell. Britain's goods trade deficit grew to £8.77bn in February from an upwardly revised £7.88bn in January, according to the Office for National Statistics.
Economists surveyed by Bloomberg had forecast a gap of £7.65bn.
The goods trade deficit with non-EU countries widened to £5.02bn in February, from £3.72bn in January.
The dip in export values was driven by falling sales of cars to countries outside the EU, including the US, China and Russia.
09.24 More from the ECB on its LTRO "bazooka":
Since the first three-year LTRO was conducted, the costs of debt market funding for banks have declined at the short end of the yield curve, thereby providing some relief as well as asset valuation benefits. Moreover, debt issuance gained momentum, possibly to provide collateral for use in the second three-year LTRO.Nevertheless, the liquidity provided by the Eurosystem is only an incomplete and imperfect substitute for market funding. Moreover, while this liquidity has averted an abrupt contraction in banking operations, it will not fully restore the normal transmission of monetary policy impulses.
09.13 The ECB has just released its Monthly Bulletin. The 212 page document echoed much of the sentiment outlined by ECB governor Mario Draghi last Wednesday at his monthly press conference. In short: inflation risks are rising, a moderate recovery is expected, and the LTROhas been a success. The ECB stressed that "further developments need to be carefully monitored."
The report served as a reminder that the ECB's SMP and LTRO were non-standard measures, and therefore had a limited shelf life:
It is also important to keep in mind that all the non-standard monetary policy measures are temporary in nature and that all the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner.