Another day, another Italian bond auction | FT Alphaville

Another day, another Italian bond auction

Breaking on Monday morning…



So the good news is that Italy raised the maximum amount, although we don’t know the degree to which this was taken up by domestic as opposed to overseas investors. And this is the first time in two years Italy offered only one issue a BTP auction, which usually totals between €5-7bn, according to traders. In other words this auction was small enough to be digested fairly easily by domestic demand.

The bad news is the yield of 6.29 per cent: it’s up from 5.3 per cent last time and a euro lift-time high.

On a more positive note,  it’s below the level Italian 5-year bonds were trading at this morning.

Even so, 6.3 per cent is too high for comfort and the auction is hardly a ringing endorsement of Super Mario and his government of technocrats.

True, it’s very early days for the new government. It’s not even been sworn in yet. But it has an awful lot to do and investors are right to be sceptical. First, it must implement the measures presented at the recent EU summit and then it will probably have to introduce further austerity measures to reach a balanced budget by 2013. How that will sit the Italian parliament and public is difficult to say.

On top of that, a former PM is still making mischief.

From the FT:

The public humiliation of Mr Berlusconi on Saturday night – his motorcade chased through the streets and crowds of thousands screaming abuse as he handed in his resignation – reflect the extent of the ex-prime minister’s fall from grace.

But as he defiantly told a party leadership meeting hours earlier, they still retain the “golden share” in Mr Monti’s enterprise, particularly in the senate.

“We are ready to pull the plug,” Mr Berlusconi was quoted as saying.

To a degree that’s bluster but it shows that Silvio could make life difficult for Mario and the technocrats, who face a tough task in restoring Italy’s credibility.

A point not lost on economists at BarCap, who say the ECB must continue to buy BTP’s:

We welcome political developments in Italy as we think that a technocratic government will have more chance of success in pushing for parliamentary approval of structural measures. Even in the context of a more positive political scenario such as this, we think that it would take time for Italy to regain fully, if at all, market confidence. Italian policy reform is a necessary condition to stabilise Italian debt markets at sustainable interest rates (Italy: Time to act, 21 June 2011). Political resistance to the reforms will not be easy to overcome. However, we feel reasonably confident that political roadblocks will be cleared in the weeks and months to come, and that Italian politicians will be able to lay the policy foundations for a rehabilitation of Italian credit. Yet, it will take time for the reforms to be implemented, and for their beneficial impact on growth and debt dynamics to become visible. In the meantime, investors will be confronted with mainly unsettling news, as fiscal consolidation tends to be associated with weak economic activity

For this reason, we believe it is essential that the ECB continues to support Italian debt in the secondary market as Italy faces heavy bond redemption over the next few months. Ideally, this support would be complemented by EFSF and IMF efforts to support the primary market (eg, through precautionary credit lines to provide a liquidity backstop should Italy face difficulties in rolling over its large debt stock in the coming months and quarters). For next year, we estimate total gross supply (bills and bonds) at EUR440bn.


And in other fixed income news, the yield on the Spanish 10-year note inches ever closer to 6 per cent.

Has the market moved on?

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And the next dominoes to fall are.. – FT Alphaville