Instant view: Italy sells 5 billion euros of 12-month T-bills

LONDON Thu Nov 10, 2011 6:07am EST

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LONDON (Reuters) - Italy sold 5 billion euros of 12-month treasury bills on Thursday in an auction which analysts said went better than feared, even though the euro zone's third largest economy's borrowing costs soared.

Gross yields at the sale rose to 6.09 percent -- the highest since September 1997 -- from 3.57 percent at a previous sale of 12-month paper on October 11 and the sale drew bids worth two times the amount issued, compared with 1.9 times last month.

LATEST COMMENTS:

RICHARD MCGUIRE, RATE STRATEGIST, RABOBANK, LONDON

"This represents the highest such yield since September 1997 and although favorable relative to that of the October 12s, which had briefly broken through 8.0 percent in the secondary market this morning, certainly does nothing to dispel the concern that Italy's debt costs have moved firmly into unsustainable territory."

EARLIER COMMENTS:

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

"It's certainly gone a lot better than the secondary market levels were tending to indicate, but the spreads are so wide that you always have to take secondary market indications with a pinch of salt. It is better than expected but still not sustainable. There will be some relief that it hasn't printed with a 7 percent handle but the idea that Italy can carry on with 6.1 percent for one-year paper is a joke."

ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDM

"For T-Bills there is always domestic demand involved so it's a lot easier for Italy to find buyers to lower the exposure. But the main point to be concerned about here is the huge 250 basis point jump in yields compared to the last time to roughly 6 percent. If this carries on then next month's yield could be 8.5 percent, which cannot happen."

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, CIB

"Very solid, far better than was feared yesterday. In the grey market the paper rallied over 120 basis points before the auction, and it's come through the market by a considerable margin. The micro view is supportive, but this makes no difference to the macro view of Italian rates trending sharply higher. The pressure is still on for policymakers to take aggressive action to increase confidence and stop the market breaking down further."

NEWEDGE BROKERAGE

"Net flows and interesting yields have supported demand. Domestic retailers have probably supported demand as they usually roll their positions."

MARKET REACTION:

- Bund future down 5 ticks at 138.76 vs 137.91 before auction

- Italian/German 10-yr spread 540 bps vs 535 bps before auction

BACKGROUND:

- The 12-month Italian Treasury bills were yielding 7.5 percent in the grey market before the auction, as the country's borrowing costs stayed near levels seen as unsustainable to finance its more than 2 trillion euro debt burden.

- Italy faces another test of investor appetite for its debt when it auctions up to 3 billion euros of five-year government bonds next week, despite the spike in its yields.

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