Italian bond auction a success

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Italian borrowing costs fell yesterday even after a downgrade by Moody’s, as strong demand in a €6bn government bond auction boosted sentiment.

Italy was downgraded one notch by the rating agency to A3, six notches below the highest triple A rating. Yet the country sold €4bn of benchmark securities due November 2014 at a yield of 3.41 per cent, down from 4.83 per cent at the last auction of similar-maturity bonds on January 13 and the lowest since March. The bid to cover ratio was 1.4 times.

Italy also sold a total of €2bn of bonds due in 2015 and 2017.

The Netherlands also sold five-year notes and Spain, Greece and Belgium auctioned bills.

The sales bring Italian issuance this year to €35.4bn, meaning that the country has already refinanced more than a third of the €90bn of maturing bonds it must repay or roll over between February and the end of April.

One trader said: “The Italian auction went very well. We are seeing banks continue to buy and some big international funds are buyers too.”

Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said: “Moody’s downgrading the country was really not a factor that went against it because it probably was already priced in and people are still thinking that the government is going to make the right reforms to put the country into potential growth and a better situation.”

In the secondary markets, Italian 10-year yields fell further to 5.57 per cent, a sharp drop in the space of a month. These yields stood at 7.16 per cent on January 9.

Goldman Sachs said that it had stopped recommending Italian 10-year bonds over their French counterparts after the yield difference narrowed toward the bank’s 250-basis point target.

But Spain underperformed Italy as it was downgraded two notches, also to A3. Portugal was cut to Ba3 from Ba2, with a negative outlook.

Spanish 10-year yields jumped to 5.28 per cent. Spanish yields have also fallen in recent weeks, but not as steeply as Italian borrowing costs. Spanish yields stood at 5.70 per cent on January 6.

Greek two-year notes slumped as the Athens-based Hellenic Statistical Authority said gross domestic product dropped 7 per cent from a year earlier in the fourth quarter after contracting a revised 5 per cent on an annual basis in the third quarter.

The two-year note yield jumped almost 24 percentage points to 207.38 per cent, with the price on the securities dropping to 19.47 per cent of face value.

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