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:
- €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 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.