Italian three-year borrowing costs fell to their lowest in almost two years at an auction yesterday, adding to signs the eurozone’s debt crisis has been tempered by bold action by the European Central Bank.
The Treasury also paid lower yields to sell its first 15-year bond in more than a year, indicating longer-term borrowing was also benefiting from the ECB’s plan for buying bonds issued by the governments struggling most with high debt.
“The very fact that the Treasury issued its longest-dated conventional bond since Italy was sucked into the eurozone crisis last summer says much about the dramatic improvement in sentiment towards the periphery,” said Nicholas Spiro of Spiro Sovereign Strategy.
Debt markets have eased much of the pressure on the two bigger eurozone economies now in the line of fire in the crisis since ECB President Mario Draghi made a pledge in late July to do all that was needed to defend the euro.
But there are still concerns, ranging from whether Italy and Spain can generate the growth needed to bring down debt, to the shape of an Italian Government after 2013 elections and whether they will stick to any conditions attached to ECB bond-buying.
Spiro said it was premature to think the crisis that has rocked the eurozone for almost three years has been stemmed for good and that Italy remained vulnerable.
“The depth of the recession, the scant prospect for meaningful growth, the size of the country’s refinancing requirements and, crucially, the increasingly uncertain political outlook all pose significant risks going forward.”
Underscoring those concerns, Italy’s business lobby Confindustria said the eurozone’s third biggest economy would shrink 2.4 per cent this year and 0.6 per cent in 2013 – making it hard to eat into a debt pile now at 123 per cent of GDP.
It also said the vote due in the spring “could lead to postponement of decisions on spending and investments”.
Uncertainty about what sort of government will follow Mario Monti’s technocrat administration is worrying investors, who fear a new executive led by elected politicians will tear up painful reforms that have restored Italy’s credibility.
More generally, a big improvement in market conditions could encourage policymakers in Italy and elsewhere to take their foot off the pedal – for example by deterring Spain from asking for aid.
Spanish Prime Minister Mariano Rajoy said on Wednesday it may not be necessary for Madrid to ask for help.
Market sentiment further improved last week when Draghi announced the details of the bond-buying plan and got another boost on Wednesday when Germany’s top court gave its greenlight to the eurozone’s new rescue fund – allowing the ECB to act should it be asked by a government.
On Thursday, the yield on the Italian 10-year bond stood at 5.06 per cent, down from around 6.6 per cent in late July.
The Spanish equivalent stood at 5.74 per cent down from more than seven per cent.
At Thursday’s auction, Italy sold the maximum targeted amount of €6.5 billion, a higher size than recent mid-month sales.
“It really does go to show how much optimism there is on the back of the OMT (ECB bond-buying plan),” said Marc Ostwald, a strategist at Monument Securities.
Analysts said reopening the 15-year bond for the first time since July 2011 denoted confidence and was important because it allowed Rome to marginally offset the moderate decline in its average debt maturity.
The auction yield on the 2015 BTP fell to 2.75 per cent from 4.65 per cent at the previous sale in mid-July, a shade under the rate the Treasury paid in mid-March 2012 and the lowest level since October 2010.
Rome had skewed the auction towards this maturity, which is benefitting from signals the ECB plan will target bonds of up to three years and managed to sell the top targeted amount of €4 billion.
The yield on the 2026 bond, sold for €1.5 billion, came in at 5.32 per cent from 5.9 per cent at the previous auction in July 2011. Italy also sold €1 billion of 2017 off-the-run bonds.