While Europe is still keeping up a facade that all is well in the aftermath of the Spanish downgrade, but far more importantly its sheer economic collapse as noted earlier, just so Italy could price €4.916 billion in two On The Run 5 and 10 year bond issues (compared to a target of €5 billion), the tension is there, as can be seen in a decidedly week Italian bond auction, which saw yields soar, Bids to Cover slide, and tails spike. Italy also sold less than the maximum in off the run 2016 and 2019 bonds. All in all, while the market may experience a brief recovery rally that Italy managed to sell anything at all (that was not a Bill of course - that gimmick always does the trick), the reality that these yields are not sustainable will slowly seep in within a few hours.
To wit, Italy sold:
- €2.5 billion of 5.5% 2022 bonds at a yield of 5.84%, a whopping tail to the trading price of 5.74%, much higher compared to the March 29 auction of 5.24%, and a weaker Bid to Cover of 1.48 compared to 1.65 before.
- €2.42 billion of 4.75% 2017 bonds at a yield of 4.86%, also much higher compared to the March 29 auction of 4.18%, and a far weaker Bid to Cover of 1.34 compared to 1.65 before.
Also, the country sold €1.03 billion in Off The Run 2016 and 2019 bonds, well less than the target size of €1.25 billion, as follows:
- €537mln of 2019 bonds at yield of 5.21%
- €493mln of 2016 bonds at yield of 4.29%
So... bonds that are just out of the LTRO's maturity are yielding 4.3%? And that for the fulcrum country of Italy? And there are still those who think the ECB will not do many many more indirect and direct monetizations...
The immediate spin is as follows, via Reuters, which apparently focuses that the debt sold at all, as opposed to such actual fundamentals as unsustainable yield, sliding bid to cover, and, oh yeah, a 10 basis point tail. But who needs fundamentals when one has the central planners such as the BOJ injecting random trillions into the market at a whim.
ACHILLEAS GEORGOLOPOULOS, STRATEGIST, LLOYDS BANK, LONDON
"It looks better than the market expected because there were quite a few negative comments coming after the Spanish downgrade."
"The 5.9 (billion euros) number is pleasing the market for now. Any number below five would have created a bit of a problem for them."
"In this environment, domestic banks are probably supporting the auction and that has been a feature for Italy since the start of this year."
MICHAEL LEISTER, RATE STRATEGIST, DZ BANK, FRANKFURT
"Overall the figures look okay, a decent auction. The bid/covers don't look great but they are in line with the averages so far this year. Volumes seem alright and both issues are overbid compared with secondary market levels.
"To sum up, at least no further bad news, nothing to provide further fuel to the sell-off we have had in periphery paper this morning."
RICHARD MCGUIRE, STRATEGIST, RABOBANK, LONDON
The auction was "reassuring in that any fears of a very poor outcome were misplaced. However, these acceptable results certainly came at a price which, in turn, leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable."
MARC OSTWALD, RATE STRATEGIST, MONUMENT SECURITIES, LONDON
"The issue was always going to be how close to the top of their target would they sell. At 5.95 billion (euros) they are very close to what was a very wide band, which is great."
"The cover is fine but it's not amazing. It never is for Italy. The more impressive part was where the selling yields were struck relative to where the secondary market was at the closing time of the auction. With the exception of the '19s, everything was sold four to six basis points below market levels so it was bid up which was very encouraging."
"But ultimately we are selling at the highs of recent months...What the whole thing tells is domestic demand remains strong...That was always going to help this sale."