Italy Successfully Sells Ultra-Short Maturity Debt

Despite European banks hoarding cash at the ECB at record levels as observed previously, Italy succeeded in selling ultra short maturity debt earlier today at interest rates that confirm Europe has managed to stabilize near-term expectations. Specifically, as Reuters reports, Italy sold 1.7 billion euros of 24-month zero-coupon bonds on Wednesday at an average 4.85 percent rate, sharply down from an auction yield of 7.8 percent a month ago.  The Bid to Cover was 2.24 compared to 1.59 previously. Nonetheless, this amount was less than the maximum 2.5 billion euros targeted at the auction. Italy also sold 9 billion euros of six-month bills at an average yield of 3.25 percent on Wednesday, half of what it paid a month ago to sell six-month paper at a bid to cover of 1.69 compared to 1.47 previously. Lastly, the fact that Italy can place debt in under 2 years when the LTRO itself has a 3 year maturity means that the real issuance test will come tomorrow when Italy is on deck to sell 3 Year bonds. As for 10 year BTP, which were trading at over 7% as recently as overnight, that is a different story completely.

Reuters with further observations:

"Many things have changed from a month ago: the government has won a confidence vote on its austerity package and the ECB has acted to help banks," an Italian bill trader said.


"This doesn't mean we can rule out further problematic auctions. Markets are easily unnerved."


Demand for bills totalled 1.69 times the amount on offer, a clear improvement versus a bid-to-cover ratio of around 1.5 at the end of November.


This is the first Italian debt sale since the ECB provided 490 billion euros in cheap three-year loans to euro zone banks on Dec. 21 in an unprecedented move aimed at easing credit strains.


Expectations of a strong take-up at the ECB's tender contributed to an equally dramatic fall in Spanish short-term borrowing costs this month.


Madrid's six-month debt costs more than halved to 2.4 percent at an auction on the eve of the ECB's tender.


However, doubts about how much of the cheap three-year funds would find their way into troubled government bonds weighed on Italian and Spanish yields in the following sessions.


Italy's ten-year yields briefly climbed back above 7 percent this week, pushing the premium over the equivalent German benchmark above 500 basis points .


On Wednesday, the yield stood at 6.8 percent, giving a premium of 489 basis points over Germany.


Credit Agricole strategist Peter Chatwell said the results bode well for the auction of three-year bonds on Thursday but he was less sure about the 10-year sale - typically a better measure of underlying interest from external investors.


"Demand for short term paper is good. It remains to be seen whether this extends to the longer maturities," he said.


Italy paid a euro lifetime record high yield of 7.56 percent to sell ten-year bonds at the end of November.

And while the market can rejoice that all is well for at least another 24 hours the real question is where will actual growth come from:

Italy can count on key support from retail domestic investors at short-term sales but longer-term bonds remain more challenging. With more than 91 billion euros of bonds maturing in the first four months of 2012, Rome faces a crucial test early next year.


In a push to regain market confidence, in the run-up to Christmas Italy's parliament gave the final seal to an emergency austerity budget rushed through by a new technocrat government.


Market attention will now turn to the reform agenda of Prime Minister Mario Monti who has promised to tackle Italy's chronic low-growth problems -- after inaction by former PM Silvio Berlusconi pushed the country to the brink of financial disaster.


Monti has convened a cabinet meeting on Wednesday to outline his plans and he could provide some indications to investors in his traditional year-end press conference on Thursday.


Analysts expect Monti's 33 billion euro austerity package to further depress Italy's weak internal demand, making government's efforts to revive growth through a series of long-delayed liberalisations even more crucial.


Italy also sold on Wednesday 1.7 billion euros of 24-month, zero-coupon CTZ bonds at an average yield 4.85 percent, sharply down from 7.8 percent a month ago.


For the first time, the Treasury set a target range for the CTZ sale, as it does for other bonds. It gives a set amount for bill auctions.