There was a time in 2011 when every European auction, particularly those in Spain and Italy, was followed with great interest due to a morbid fascination that it may well be their last. In 2012 this time has come much faster than last year. Earlier Italy sold a total of €4.5 billion in 3, 7and 8 year bonds which was at the top end of the range of expected issuance. The problem was in the unsustainable yields this debt sold for:
- €3 billion in 2015 bonds, B/C 1.59 vs 1.52 in May 14, yield soared to 5.30% vs 3.91% a month ago
- €627 million in 2019 bonds, B/C dropped from 2.27 on April 27 to 1.99; yield soared from 5.21% to 6.10%
- €873 million in 2020 bonds, B/C dropped from 2.08% on May 14 to 1.66%, yield soared from 5.33% to 6.13%
The relevant, and unsustainable pieces have been highlighted, and on top of everything these yields were well inside market prices so absent the bank overbid funded with ECB money the situation would have been even more dire. As a reminder, none other than Bloomberg yesterday made it very clear that Italy had 14 days to change its bond market dynamics before it too is "forced into receiving a bailout". Keep an eye on Spanish debt: if it continues blowing out and passes 7% all bets for Italy are off.
Analyst views on the Italian auction via Reuters
MICHAEL LEISTER, RATE STRATEGIST, DZ BANK, FRANKFURT
"It's very much in line with expectations. The pricing side of things is a bit mixed. The three-year was a tad above secondary market levels. It's not the greatest of achievements given the concession we've seen building up not only today.
"What the market is focusing on is this rise in yield levels with the three-year rates at 5.30 percent. It's not the best of signals given this renewed focus on fundamentals and also on the back of the Spain downgrade...That said, however, the auction went sufficiently well to prevent a further quickening of the selloff we've seen today."
NICK STAMENKOVIC, STRATEGIST, RIA CAPITAL MARKETS, EDINBURGH
"Italy manages to reach the 4.5 billion euro target for its latest bond auction with reasonable demand but yields significantly higher than previous month.
"Clearly investors are demanding ever higher premium to buy Italian sovereign paper. With overseas investors shifting out of BTPs domestic investors are stepping up to the plate but for how long?"
ACHILLEAS GEORGOLOPOULOS, STRATEGIST, LLOYDS BANK, LONDON
"The auction was a bit better than the market feared it would be. I don't think lots of people called for a bad auction but there was some fear after the downgrade for Spain.
"Overall good demand, they raised the money. Yields are higher, of course, but they sold the bonds at a premium to the 10 o'clock cutoff.
"But, we didn't expect the Italians to mess this up. The message cares only about the higher yields, but in terms of the lasting message it is clear Italy can still fund from the market - at high levels, but it can still fund."
ALESSANDRO GIANSANTI, STRATEGIST, ING, LONDON
"They sold the maximum amount ... I think the huge concession over the last days helped the outcome of the auction and the fact that the bond with the biggest size, the 3-year, is still attracting demand from domestic players."
"As long as Italy issues bonds staying in the short-term maturity, it will find demand. They will need to pay a higher yield but it can still issue the maximum amount. It will not be the case if they want to issue bonds above 3-years maturity."
PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, LONDON
"Strong three-year BTP auction, coming around 10 basis points through the secondary market, which is very very impressive although some of that overbidding should be taken in the context of very one-sided markets (i.e. a lack of proper two-way flow). We thought the March 2015 was too cheap in relative value terms and we expect it will continue to re-richen.
"The off-the-run auctions (Feb19, Mar20) are a similar story i.e. very big concession but the auctions have come through the secondary market levels. These auctions will be judged a success in the short term, but the trend in yields and spreads is something which requires something from the policymaker level to reverse."