Italy, Spain debt costs fall as ECB cash outweighs downgrades
MILAN (Reuters) - Italy's three-year borrowing costs hit their lowest since March at an auction on Tuesday, with an overnight sovereign rating cut having little impact as cheap ECB loans continued to support demand and ease its path towards an ambitious refinancing goal.
Spain, also caught by Moody's downgrade of six euro zone states, and Belgium each saw their cost of funds fall further at bill sales on Tuesday, while even Greece - seen at risk of a chaotic default next month - managed to place three-month paper.
Madrid sold more than 5 billion euros of bills at an auction that was more than twice subscribed despite Moody's two-notch downgrade on Monday, while one-year Belgian bill yields dipped below 1 percent at its sale, their lowest since September 2010.
Rome sold the maximum planned amount of 6 billion euros of bonds, a reassuring sign after a one-year debt auction on Monday was barely covered - possibly, the Bank of Italy said, due to a technical glitch. Tuesday's bond sale had a bid-to-cover ratio of 1.4 times, up from 1.2 a month ago when the amount sold was smaller.
The sale brings Italian bond issuance settled this year to 35.4 billion euros, meaning the country has already refinanced more than a third of the 90 billion euros of maturing bonds it must repay or roll over between February and the end of April.
"It was a good set of results. Good bid/covers, reduced yields compared to when these bonds or bonds of similar tenor were last auctioned," said Lyn Graham-Taylor, a strategist with Rabobank in London.
"The positive effects driven by the three-year LTRO (long-term refinancing operation) in December and the one to come are continuing."
Yields on short-dated Italian and Spanish government bonds have fallen sharply since the European Central Bank flooded markets with nearly half a trillion euros of three-year cash in late December. A second tender later this month is further fuelling demand for such debt, which banks can use as collateral for the ECB's ultra-cheap loans.
Traders warn yields may not have much further to fall ahead of the February 29 tender, at which banks are expected to grab another 500 billion euros of ECB money.
Italy sold 4 billion euros of its three-year benchmark bond at an average yield of 3.41 percent, a huge drop from 4.83 percent at the last such auction just a month ago.
The cost to Rome was the cheapest at a three-year auction since March, before Italy became a focus of the euro zone debt crisis in July, and compared with an average 1.35 percent paid by the top-rated Dutch to sell five-year bonds on Tuesday.
Italian government bond yields fell on the secondary market after the auction, reversing an earlier moderate rise triggered by the Moody's downgrade.
Madrid sold 5.4 billion euros of 12- and 18-month bills on Tuesday, paying 1.9 percent for its one-year debt, slightly less than at a previous auction and below the 2.2 percent yield paid by Italy on Monday at its much larger one-year sale.
"The glut of liquidity put in by the ECB is trumping fundamentals ... which is why we believe that Spain and Italy are getting away these auctions at the levels they are," said Rabobank's Graham-Taylor. "We believe it isn't sustainable and the effects of the LTROs will begin to wane."
Belgium meanwhile paid 0.89 percent to borrow for one year at a 3.2 billion euro sale of three- and 12-month paper - its lowest rate since September 2010 and down from 1.16 percent a month ago.
Crisis-hit Greece, which has yet to secure a second 130-billion-euro bailout needed to avert a default on debt maturing next month, placed 1.3 billion euros of three-month bills at an average 4.6 percent yield, broadly unchanged from a month ago.