In selling 17.7 billion euros of debt in an auction today, Spain and Italy both saw their bonds rise after the sale even as both countries had to pay more to borrow than a month ago.
Italy sold 8 billion euros of 182-day bills at a 3.071% yield, up from 2.14% at an August 26 auction, sold 76-day bills at a 1.808% yield, and zero-coupon bonds due in 2013 at a 4.511% yield. Spain sold 3.22 billion euros of three- and six-month bills, falling just below its maximum target for the auction.
According to Matteo Regesta, senior interest-rate strategist at BNP Paribas SA in London, Spain’s auction was a “very good result” and “in the near term, assuming Greece receives its disbursement, we are in for at least a short period of relatively less volatile markets.”
The European Central Bank began buying Spanish and Italian debt in August as concern that Greece may default on its debt drove up their borrowing costs. Yesterday, a central bank official said the ECB is likely to debate restarting covered-bond purchases at its October 6 policy meeting, and may discuss interest-rate cuts to ease funding strains.
After Monday’s sale, the premium investors demand to hold Italian and Spanish 10-year bonds instead of German bunds declined — the Italian spread narrowed from 381 basis points to 369 basis points, while the Spanish spread narrowed from 333 basis points to 319 basis points.
However, Italy still has a debt of 1.9 trillion euros — that’s more than Spain, Greece, Ireland, and Portugal combined — leaving it vulnerable to any advance in yields as it refinances maturing debt. While today’s sale will help cover the redemption of 8 billion euros worth of bills on September 30, Italy still faces 55 billion euros of bill maturities before year’s end. Spain still has one bond redemption left this year of 14 billion euros, and expiring bills worth another 23 billion euros.
Demand for Italian 182-day bills rose to 1.74 times the amount offer today, compared to 1.66 times last month, while the bid-to-cover ratio for the Spanish six-month note was 3.95 times the amount offer today, compared to 3.6 last month. Spanish three-month debt was down from 7.62 times last month to 2.47 times today.