Market Left With Bitter Aftertaste Following Italy €7.74 Billion BTP Auctions

Tyler Durden's picture

All eyes were on Italy early this morning when the country auctioned off €2.99 billion of 4.25% BTPs due July 2014 and €3.75 billion in 5% bonds due 2022, because the ECB, unlike in the secondary market, is not allowed to buy bonds at primary issuance. While it would have been unrealistic to expect a bond failure, the bond levels were watched very closely for signs of deterioration despite over €40 billion of SMP purchases by the ESB in the past 3 weeks. And judging by the reaction (+11 bps in the Italian Bund spread), the market was not very happy with the yields of 3.87% (4.8% previously) and 5.22% (5.77% previously) or the Bids to Cover of 1.32 and 1.27 on the 3 and 10 years, as both slipped following the auction in a market that was very disappointed to see a 5 handle yield on the 10 year. This has set a negative  tone to early European trading, with pronounced weakness across markets, and the EURUSD, which has dropped to under 1.44 overnight after trading in the 1.45's late last night. The concern is that even with the ECB buying debt in the secondary market (effectively monetizing), the tail is unable to wag the dog strongly enough, and if the EFSF is not activated soon enough, and expanded significantly, we expect to see the market test the ECB once again, and SMP purchases to soar very soon.

Market reactions to the BTP auctions:


"The auctions were slightly weak, which shows that the ECB must continue to buy bonds on the market to support it. The demand for the 10-year bond was rather weak, with a bid-to-cover ratio of 1.27 from 1.38 at the end of July and 1.33 in June. This (new) bond traded at a discount of around 15 basis points on the market in terms of yield compared with the (current 10-year benchmark) Sept. 2021 BTP, but this was not enough to draw strong demand. The bid-to-cover on the three-year bond was slightly better at 1.32 from 1.31, but the bond was sold for an overall amount which was slightly lower compared with the top of the target range. However it went better for it than for the 10-year bond."


"In size terms they have achieved what they wanted to achieve across the three sales. The yields are basically in line with secondary market levels. The covers are not overwhelming, one has to say. That would tend to suggest the bulk of it has gone into domestic hands.

"There are two ways of rationalising it -- one could say there's some disappointment over the watering down of austerity measures announced overnight. An alternative version would say given the time of year, what do you expect? It's still the holiday season and there's plenty of event risk this week, why would you go charging in?

"Market reaction is probably some disappointment because the cover wasn't brilliant. It wasn't a disaster by any means -- we shouldn't overplay it."


"The (yield) concession doesn't seem too much out of line. Against the backdrop of the average Italian funding costs over the last five to 10 years this is a level they can feel comfortable with.

"The bid/cover looks a bit weak compared with this year's averages. It will give a reason to those investors who want to sell, but overall we take it as a decent auction.

"The ECB support was clearly crucial. Without the ECB intervention a couple of weeks ago yields would not be trading at this 5 percent level so it might have easily been a full percentage point more.

"The fact that yields remained relatively stable last Friday and more importantly this morning shows indeed that the ECB was successful in stabilising them but the big question is what happens going further."


"The results look a bit worse than the market was expecting, with the 10-year looking weak with a rather small bid cover ratio. The secondary market action in the existing 10-year BTP is telling of some strain on the market in absorbing the paper, with the current 10-year now yielding 5.12 percent, and Bunds rallying. I think the market is likely to lose a bit of confidence from this auction until 10-year Italy stabilises, which is in the ECB's hands.


"We find it hard to get excited about today's auction being out of the way, as both Italy and Spain have to raise cash twice a month. We find it hard to see genuine investor interest gaining traction as long as the impression is on the front foot that current yield levels are artificially lowered by ECB buying.

"The risk of ECB buying coming to an end at some point, risking a back-up in yields, leaves the risk/reward balance for longs unattractive, if one excludes the ECB stepping in so heavily that 10y SPGB and BTP yields dive towards the 4.50% region."

Source: Reuters

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Dick Darlington's picture

Interesting story from Italy. Small community using its own currency.

Pay Day Today's picture

Community currencies are very useful things. Good to set one up quite small scale for trading specific popular good and services within close networks of people. Then scale up as the need and desire arises.

anynonmous's picture

Business Insider is an excellent resource for balanced financial information and commentary


for example this headline

Actually That High Stakes Italian Bond Auction Went Pretty Well

Simone Foxman

(It never ceases to amaze me that Business Insider is as popular as it is, but then again I was once at a Walmart and it too was busy. I wonder if Simone would be the equivalent of a Walmart greeter and the readers of Business Insider the equiv of the people of Walmart.)

PY-129-20's picture

Reminds me of the Austrian Freigeld and the miracle of Woergl during the Great Depression. It was terminated by the Austrian National Bank.


props2009's picture

charts of gold vs corn crude vs s&p

Guess the winner ?

Sudden Debt's picture

hmm... our mainstream media is talking about a hugh succes in the italian auction :)

not that they ever covered bad info... :)

mayhem_korner's picture

When it comes to the affairs of Italy, it's propa gianda (to be consumed with reservo chianti)

papaswamp's picture

Italian Economic indicators substantially weaker than anticipated. Retail sales coming in lower than expected (-0.20% vs 0.20% exp).

What really has surprised me is the very little reaction to the bad Japanese economic news.

Household spending, though better than expected was still negative (-2.1%)

Unemployment rose (4.7%)

Retail sales YoY with a big contraction to 0.7% (1.5% exp)

tim73's picture

This article is full of crap, typical yank bullshit. When US T-bond yields drop it is all about "flight to safety" but when yields of Italian bonds drop it is all about "markets being not happy", according to you idiots.

LookingWithAmazement's picture

Again no armageddon. ECB saved Italy's day last few weeks. Boring world we live in.

slewie the pi-rat's picture

yes, this was italy raising euros without the EU

so, of course, it was "disappointing" to EU types, but i think messers ostwald and leister understand what happened, here, and italy raised some money, at a (neg) discount to what goes down w/ the ECB playing QE in the same sandbox

tyler has it right, too:  "...and if the EFSF is not activated soon enough, and expanded significantly, we expect to see the market test the ECB once again,..."  this is where merkel is gonna have her ample commie ass handed to her, politically, and if so, germany will hold elections, and france will hold a liquidation sale, imo.  i do not believe this turkey will fly w/out a new EU treaty and a new political arrangement, so never say never, but to me. it is a long shot

the EFSF is in trouble b/c it is, m/l illegal at the level they are trying to push.  this isn't america.  they don't have a federal system, they EU is a confederation of free states, much like the first US goobermint.  this level of debt, QE, and bailout violates the treaties of confederation.  like nobody is gonna notice? 

what are the central planners and banksters to do?  start a civil war and then establish a no fly zone and bomb the living shit outa everything to "protect civilians"?  declare martial law and the EU "too big to fail"?   have the FED bail them out?  that seems almost "reasonable", no?  maybe with china in a show of NWO solidarity? 

no, i don't think the EFSF will be "in time" b/c it ain't gonna happen without a new EU, no matter what the "feasibility study" says, it seems to me, at this point. 

as tyler said on august 15:   We can’t wait to hear Germany’s reaction to the fact that cumulative SMP purchases (and thus “Weimar” risk) increased by 30% in one week.

germany's reaction seems to be:  fuk loans!  if you want money, sell us your gold, and your industries;  if that doesn't get you straightened out, we may be willing to buy your children, later, but not for much.  that way we can all either stop kidding each other, or simply stop the EU.

the brothers grimm, BiCheZ!


oogs66's picture

Italian and Spanish bond yields dangle by a thread. If the market decides to challenge the ecb, the market will win. The big move tighter was on no volume so the problems are still there

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