Italian Bond Auction Shows Demand For Short-Term Debt, Produces Record Setting Yields


Following Monday’s stock market rally, United States markets opened higher ahead of another meeting of finance ministers in the Euro zone who are coming under pressure to find a permanent solution to the lingering debt crisis in the region, although gains were tempered by a housing report that showed a decline in single-family home prices for the month of September.

In a bond auction on Tuesday, Italy paid fresh Euro-era highs for three and ten year paper, and saw sufficient demand for shorter maturity debt which gained assistance from yields that rose as high as 7.89%.  Wednesday’s markets were spooked by the disappointing auction of 10-year German debt.

Crediting modestly improved demand, stocks in Europe posted gains on the heels of the Italian bond auction.  Italy raised €7.5 billion, which was near the top of its targeted goal.  The country saw the yield on the three-year paper jump to 7.89%, with a rise in 10-year yield to 7.56% – a new high for the Euro zone.

Italian Bond Auction Shows Improvement Over Wednesday’s German Bond Auction

While the results of the Italian bond auction were not stellar, they are considered more successful than the German Bund auction on Wednesday, where there was a failure to sell 10-year paper.  If need be, Italy has at least a couple of quarters where it could fund at the present levels.

As Italy’s prime minister will face an uphill battle in the days ahead, as he looks to prop up the nation’s strained public finances, with an expected IMF mission in Rome and pressure building in the markets to the point where help may be needed from the outside to quell a full-on debt emergency for the country.

Contrary to earlier reports by Italian media, the IMF has stated that there have been no discussions with Italy concerning a program for IMF financing.  The Italian media had previously reported a possibility that the IMF could make up to €600 billion available to Italy at a rate between 4% and 5% in order to provide the nation with eighteen months of breathing room.

Mario Monti, Italy’s Prime Minister is expected to announce measures on December 5th that may include expedited increases in the pension age, a sales tax increase, and a refurbished  housing tax.  Pressure stemming from equity markets could, however, force Monti to act with more speed.

Italy In The Eye Of The Storm, US Receives Time Frame For Addressing Budget Deficit

With the Italian bond auction yields reaching levels that previously set in motion the collapse of former Italian Prime Minister Berlusconi’s centre-right government, Italy has positioned itself directly in the eye of the European debt crisis storm.

The range seen for yield on Italian bonds are similar to the yields that forced Portugal, Ireland and Greece to seek international bailouts, and Tuesday’s auction of up to €8 billion of BTP bonds will prove to be a critical test.

Following Monday’s rally, credit ratings agency Fitch issued an ultimatum to the United States to devise a viable plan to address its budget deficit by 2013 or run the risk of a downgrade from its AAA rating.  European markets felt the pressure from possible downgrades from ratings agencies in early morning trading.

France could be a mere days away from a downgrade to its AAA rating from Standard & Poors, and the low-level debt of 87 banks spanning 15 nations could also face downgrades on the fears that governments will be unable to bail out the troubled financial institutions.

The sixth portion of aid for Greece is expected to be approved by European ministers, and leaders are also charged with finding a deal to leverage the rescue fund for the region.  Leaders are also gearing up for the much anticipated summed of European Union heads of state next week.