October 28, 2011 / 3:41 PM / 8 years ago

EURO GOVT-Italian yields jump after disappointing auction

* Italy’s sale of 7.94 bln euros meets lower demand than previously

* Country pays high premium for selling 10-year debt

* German bonds pare losses after auction

By Kirsten Donovan and Ana Nicolaci da Costa

LONDON, Oct 28 (Reuters) - Italian government bond yields extended their rise on Friday after a disappointing debt auction suggested a euro zone rescue deal had not gone far enough to restore investor appetite for Italian debt.

Italy’s sale of 7.94 billion euros of government bonds met lower demand than at previous auctions and the country paid the highest premium since joining the single currency to sell 10-year debt.

“Today you’ve had a weak auction and yields are up ... along the curve. I think that tells you all you need to know about what the bond market’s reaction to the summit is,” said Brian Barry, analyst at Evolution Securities.

“Markets remain sceptical and there is no proof yet that what we have been given will solve the crisis.”

Italian government bond yields were 12 basis points higher on the day at 6.01 percent — not far from 6.1 percent hit last week — their highest since the European Central Bank first began buying Spanish and Italian bonds in the secondary bond market in August.

The high yields at auction came despite the ECB intevening in secondary markets after the announcement of the rescue deal.

The Spanish equivalent jumped 16 bps to 5.50 percent.


German Bund futures fell 191 ticks in the previous session and declined as far as 132.89 earlier, but pared losses after the auction to settle 4 ticks lower at 133.67.

“Going into the weekend there’s a bit of a correction, it’s month-end and there’s some realignment from funds but we expect to see more losses next week,” said one trader.

Euro zone leaders have agreed on a deal which will see private holders of Greek bonds take a 50 percent loss on their investments, while banks will be recapitalised and the size of the EFSF euro zone bailout fund will be scaled up to around 1 trillion euros.

Analysts urged against euphoria over the deal, flagging a series of risks that could become more evident as the details of the plans are hammered out.

“A framework is in place but the details are not there yet,” said Nick Stamenkovic, rate strategist at RIA Capital Markets.

“If they don’t come up with more substance by the end of the G20 summit (Nov 3-4), the market will start losing patience.”

There are questions as to whether the size of a Greek write-down is sufficient to put Greek debt back onto a sustainable path. Economists polled by Reuters on Thursday were split down the middle over whether the writedown was big enough. .

There is also uncertainty how exactly the fund’s firepower will be boosted.

The European Financial Stability Facility will be leveraged either by offering insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from countries like China and Brazil.

The question is whether there will be enough demand from those countries, in particular China, and the head of the euro zone bailout fund has played down hopes of a quick deal with Beijing to throw its support behind efforts to resolve the bloc’s debt crisis .

“If the market doesn’t believe this package is going to work ... (the officials) don’t have many options left,” said RIA’s Stamenkovic.

“This is as comprehensive as it can be and if this doesn’t float, the pressure will be on the ECB to do something more substantive.”

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