Record retail debt sale lifts Italian bonds as ECB eyed

Wed Nov 6, 2013 9:04am EST

Related Topics

* Italy to close inflation-linked bond retail sale early

* Retail debt sale sets new record just over 22 bln euros

* Sale seen easing Italy funding pressure

By Emelia Sithole-Matarise

LONDON, Nov 6 (Reuters) - Italian bond prices rose on Wednesday after record demand at a retail sale of inflation-linked bonds reduced the country's funding needs for the rest of the year.

Italy raised just over 22 billion euros with a sale of 4-year debt. It was the biggest single bond sale by a European government and prompted the Treasury to close it more than two days earlier than planned.

Comments by a top U.S. Federal Reserve official that the Fed should wait for the economy to gain momentum before trimming stimulus helped lift euro zone debt broadly.

Against this backdrop, yields on junk-rated Portuguese bonds dropped to their lowest level in five months.

Italian 10-year yields fell 3 basis points to 4.15 percent , slightly outperforming other euro zone bonds. Spanish 10-year yields fell 1 bp to 4.11 percent.

"It's another blockbuster sale of this issuance," said Commerzbank strategist Michael Leister. "Overall it takes away a significant share of the funding pressure because now they have more freedom to reduce the conventional BTP issuance in other sectors of the curve."

Italy had already met almost 90 percent of the roughly 470 billion euros it needs to borrow this year and analysts say the successful sale could allow it to cut auction sizes for the rest of the year.

This strong financial position and expectations the ECB could loosen monetary policy further are allowing Italy to fend off pressure from political tensions before a Senate vote on whether to expel ex-premier Silvio Berlusconi from parliament.

"They (Italy) have a lot to roll over each year, which is a risk, but they have demonstrated throughout the crisis that they are in a comfortable position doing this and they have the instruments and investor base to achieve this," Leister said.

FED SIGNALS

San Francisco Fed President John Williams said overnight the central bank should wait for stronger evidence of growth momentum before trimming its $85 billion monthly bond-buying.

This helped stop a Tuesday sell-off triggered by doubts over whether the European Central Bank would this week signal an imminent cut in interest rates.

Portuguese 10-year yields dropped 20 bps to 5.942 percent, the lowest since early June, albeit in an illiquid market which exaggerates price moves.

"It appears to be more a continuation of the trend we've been seeing since last week with a general good demand for Portuguese debt," said Filipe Silva, debt manager at Carregosa bank in Lisbon.

German Bund futures were last 21 ticks up at 141.37, having fallen more than 70 ticks the previous day as players judged the market might have gotten ahead of itself in expecting a strong signal from the ECB or even an actual rate cut. A Reuters poll showed only one of 24 traders surveyed expected the ECB to cut interest rates on Thursday.

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