Italian 10-year yield falls below 5%

Italian benchmark bond yields fell below 5 per cent for the first time since August in a continuation of the big rally sparked by cheap European Central Bank loans to banks.

Yields on 10-year Italian debt fell as low as 4.90 per cent, snapping at the heels of Spanish rates, which were 4.83 per cent. Both countries have benefited from the ECB’s longer-term refinancing operation, under which banks have taken about €1tn in the past three months. Much of this has been used to buy sovereign debt.

Italy last traded below 5 per cent in the days after the ECB’s last big intervention, when it started buying Rome’s and Madrid’s bonds directly in the market in August.

But in the months after that intervention investors were unnerved by the lack of reforms enacted by the Italian government, causing yields to go as high as 7.5 per cent, before falling this year under the influence of the ECB and the new technocratic government of Mario Monti. Rome has also caught up with Madrid, with borrowing costs having been as much as 200 basis points higher than Spain’s at the start of the year.

The move has been even more marked at the short end of the yield curve, where analysts estimate most of the LTRO cash has been put to work. Italy’s two-year yields have fallen from 6 per cent in mid-December to 1.69 per cent on Thursday. They have fallen considerably below Spain’s two-year yields in recent days, which traded at 2.16 per cent, down from about 4.9 per cent in mid-December.

The falls in the secondary market yields came as Spain raised €4.5bn in a firmly subscribed auction of shorter dated bonds on Thursday. It has now sold nearly 40 per cent of its targeted issuance for the year in just two months.

In Spain’s first debt sale since European banks gorged on €530bn in cheap loans from the ECB in the second LTRO on Wednesday, the Spanish treasury again managed to attract strong demand from investors, selling at the top of its proceeds target for the two, three and five-year bonds.

Analysts have argued that the avalanche of debt sold by Madrid in such a short amount of time indicates the government is keen to take as much advantage as possible of the window offered by the ECB.

Spain, as expected, paid less to borrow in Thursday’s auctions, with yields on the five-year bond falling from 4.02 per cent in a sale made in January to 3.38 per cent, and the three-year yield down from 3.33 per cent in February to 2.62 per cent.

Despite the positive auction and movements in secondary markets, some investors remain sceptical about whether Italy and Spain are entirely out of the woods, with weak economic and deficit data from Madrid in particular causing concern.

“You can’t declare this crisis over yet. You just feel that one big negative event in the eurozone could tip things over again,” said one large UK-based investor.