Earlier today Italy sold €5 billion in 1 year Bills at an average yield of 6.087%, the highest since September 1997, and almost 3% higher compared to a month ago, when it prices at 3.570%. Yet there was a stunning twist: the 1 Year was trading at a whopping 7.75% in the gray market minutes before the auction, or almost 200 bps wide of the auction result, something which never happens under normal conditions unless the invisible hand of the central bank has anything to say about it. Now we know already that the ECB stepped in to aggressively mop up Italian bonds in the secondary market immediately after the auction to bring 10 year yields below 7%, however briefly: the bond has since widened above that level once again. Yet what is shocking is the primary market strength for the 1 year: since the ECB is prohibited by law from intervening in the primary, auction market, we wonder just what illegal backdoor funding scheme the ECB has concocted with friendly banks in order to have the auction price where it did, and how much money was transferred by back door channels to keep Europe from imploding one more day. Considering that the EURUSD was trading below 1.35 just prior to the auction at around 3 am, and has since regained losses, just as we expected yesterday, please remind us to add this latest illegal central bank intervention feature to the list of things to uncover once Europe blows up and the ECB's secret trading records are laid out for all to see. In the meantime, here is the Wall Street snap reaction to the Bill auction.
RICHARD MCGUIRE, RATE STRATEGIST, RABOBANK, LONDON
"This represents the highest such yield since September 1997 and although favourable relative to that of the Oct. 12s, which had briefly broken through 8.0 percent in the secondary market this morning, certainly does nothing to dispel the concern that Italy's debt costs have moved firmly into unsustainable territory."
MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON
"It's certainly gone a lot better than the secondary market levels were tending to indicate, but the spreads are so wide that you always have to take secondary market indications with a pinch of salt. It is better than expected but still not sustainable. There will be some relief that it hasn't printed with a 7 percent handle but the idea that Italy can carry on with 6.1 percent for one-year paper is a joke."
ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDM
"For T-Bills there is always domestic demand involved so it's a lot easier for Italy to find buyers to lower the exposure. But the main point to be concerned about here is the huge 250 basis point jump in yields compared to the last time to roughly 6 percent. If this carries on then next month's yield could be 8.5 percent, which cannot happen."
PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, CIB
"Very solid, far better than was feared yesterday. In the grey market the paper rallied over 120 basis points before the auction, and it's come through the market by a considerable margin. The micro view is supportive, but this makes no difference to the macro view of Italian rates trending sharply higher. The pressure is still on for policymakers to take aggressive action to increase confidence and stop the market breaking down further."
"Net flows and interesting yields have supported demand. Domestic retailers have probably supported demand as they usually roll their positions."