Weak Italian, Belgian Bond Auctions Send EUR Lower, Sovereign Spreads Surging

Today at around 5 am Eastern Italy conducted an auction of 3 and 10 year paper. The result was a very weak auction with spreads jumping compared to the prior auction even as BTCs dropped. The Italian treasury sold €5.5 billion of the BTPs, compared with the 83.5 billion to €5.5 billion planned. It also sold €1.339 billion of the October 2017-dated floating rate bond, or CCTeu, compared with €1 billion to €1.5 billion planned. But the sale came at a steep price. The 3 Year sale of €2.5 billion 2.25% bonds closed at 2.86% compared to 2.32% prior, and a bid to cover of 1.38 compared to 1.35 previously. The yield on the 10 Year auction came at 4.43% or over half a percent higher compared to the previous auction of 3.89%, pricing at a 1.27 Bid to Cover, much worse than the 1.42 previously.

More from Dow Jones:

Italy Monday paid higher yields than a month ago to sell three- and 10-year government bonds as markets failed to improve ahead of the sale, despite the announcement of a long-awaited bailout for Ireland.

The auction result was not surprising given the prevailing nervousness, and the yields came in tighter than secondary market levels. But the euro weakened to $1.3191/$1.3194 by 1045 GMT from $1.3203/$1.3207 before the close of bidding, and the 10-year Italian/German yield spread surged to a euro-era high of 1.83 percentage points.

"Demand for both lines was decent but not exceptional, given the concession given ahead of the auction," said Annalisa Piazza, an economist at Newedge.

And just to confirm that Belgium and Italy are just after Spain and Portugal on the bailout wagon, an auction held by Belgium earlier also came at decidely weaker Bid To Covers.

Belgian Auction results:

  • €0.62bln, 4.25% 28-Sep-14, bid/cover 1.79 vs. Prev. 2.24 (yield 2.288% vs. Prev. 3.839%)
  • €0.945bln, 3.75% 28-Sep-20, bid/cover 1.76 vs. Prev. 2.39 (yield 3.718% vs. Prev. 3.260%)
  • €0.435bln, 5% 28-Mar-35, bid/cover 1.79 vs. Prev. 2.38 (yield 4.157% vs. Prev. 4.816%)

h/t Mark's Market Analysis