January 13, 2012 / 10:52 AM / in 8 years

Instant view: Italy sells 4.75 billion euros of government bonds

LONDON (Reuters) - Italy sold 4.75 billion euros of government bonds on Friday in an auction which analysts said did not go as well as some in markets had expected.

The three-year benchmark paper, maturing in November 2014, drew bids worth 1.22 times the amount on offer, compared with a 2011 average of 1.39. The gross yield fell to 4.83 percent from 5.620 percent at the last opening of the bond at the end of December.

The auction came a day after Spain sold twice the planned amount of bonds, supported by domestic banks awash with European Central Bank liquidity.

Jumping on the back of the better market tone, Belgium also plans to sell up to 500 million euros of longer-dated bonds on Friday.

MICHAEL LEISTER, STRATEGIST, DZ BANK, FRANKFURT

“Today’s Italian three- to six-year taps attracted decent demand. The auction metrics look robust on aggregate, although not as spectacular as yesterday’s Spanish supply.

“It is tempting to conclude from the Italian bill and bond auctions that PM Monti is rapidly regaining investors’ trust. We remain cautious, however, with regards to such a ‘fundamental’ interpretation.

“As we explained yesterday, the ECB carry-trade is by far the key driver of the recent outperformance of short-dated periphery bonds.”

ACHILLEAS GEORGOLOPOULOS, RATE STRATEGIST, LLOYDS BANK

“Taking into account what happened yesterday with the Spain auction, which raised expectations, it was much worse than what the market expected. And if we said for the Spanish auction domestic banks helped it’s probably that Italian banks have less available liquidity to participate.

“But on an outright basis it was a decent auction, yields were lower, the bid/covers were OK. The market probably got too carried away as Spain raised double the size they had originally wanted to yesterday and so people were probably expecting the Italian bid/covers to be stronger than this.”

ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY

“For the off-the-run lines, today’s auction received smooth demand, mainly because of the small amount on offer. On the other hand, demand for the three-year on-the-run paper was not exceptionally strong. We expected a somehow more robust 1.4-1.5 cover. If anything, the paper was priced at around 80 basis points below the yield of the December auction and more than 300 bps below the November yields. The steepening of the Italian curve in the past few weeks might justify the relatively soft outcome of today’s tap...We expected the relative good yield pick-up versus surrounding issues to be more supportive at today’s tap.”

MARC OUTWARD, STRATEGIST, MONUMENT SECURITIES

“They sold the maximum which is probably the most important thing ... There is still a lot of hard work to go through. It’s not going to be easy. There is nothing to worry about here but there’s, on the other hand, not a lot to drive yields any lower in Italy.

“After the stellar bill auction in Italy and the very good Spanish auctions yesterday, there will be some disappointment in the market. I don’t think the results are disappointing but I think there will be market disappointment that the results weren’t stronger particularly in cover terms, I think that yield levels are OK.”

RICHARD MCGUIRE, STRATEGIST, RABOBANK, LONDON

“On the whole the auction results are mixed to soft, certainly far from the humdinger we saw in Spain yesterday. They did manage to issue at the upper range of the early guidance at 4.75 billion but bear in mind that Spain did double yesterday.

“This will serve to dampen some of the markets enthusiasm in the wake of yesterday’s Spanish auction and perhaps limit optimism with regard to the potential LTRO impact on peripheral debt. It doesn’t defeat the notion that the ECC extraordinary liquidity provisioning will support peripheral debt but it perhaps tempers expectations as to what degree these operations will support.

“Net disappointing relative to expectation in the wake of yesterday’s Spanish sales.”

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE

“They sold the maximum amount but prices look weak relative to the secondary market in the November 2014 (the only benchmark on offer) and bid/cover ratios are lower than the market was expecting. I think in the euphoria of Spain’s auctions yesterday and Draught’s comments the market got carried away - this should help bring expectations back to earth.”

MARKET REACTION:

- Bund future up 50 ticks at 139.66 vs. 139.48 before the auction

- Italian 10-year bond yields 6.566 percent vs. 6.527 percent before the auction.

- Italian/German 10-year spread 478 bps vs. 473 bps before the auction

BACKGROUND:

- Italian bonds rallied in the secondary market this week, pushing 10-year yields well below the critical 7 percent level seen as unquestionable.

- Demand for three-year bonds has been strong with analysts speculating banks are gathering collateral for the PCB’s next three-year tender in February. A bigger test may come with five- and 10-year bond sales on January 30.

- Fitch Ratings said on Thursday there was a “material risk” it would downgrade Italy by the end of the month but expressed confidence the government would be able to raise what it needs on debt markets, albeit at a cost.

- Italy has around 100 billion euros of redemption and coupon payments due in the first four months of the year.

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