Italy again had to pay investors yields averaging above 7% at its government bond auctions Tuesday, as the euro zone's third-largest economy continues to borrow at costs that forced Greece, Portugal and Ireland to seek external bailouts. The auction of up to €8 billion in bonds over a range of maturities saw Italy paying a yield of 7.89% on three-year bonds and 7.56% on 10-year paper. Both marked new euro-era highs. That Italy had to offer higher yields on shorter-dated bonds at Tuesday's sale underscores how investors want to be compensated for the risk attached to the country's near-term fiscal outlook. Demand at the auction totaled €10.9 billion, enough to safely cover the amount on offer. But the margin was still small; the bid-to-cover ratio on the 10-year sale, for example, totaled 1.34, up marginally from a slim 1.27 last month. Yields in the secondary market initially fell on the results, but the benchmark 10-year yield remained sharply higher on the day. "Italy does not have the ability to push down its funding costs to sustainable levels," said Jeffrey Sica, president and chief investment officer of SICA Wealth Management, which has more than $1 billion in client assets, real estate and private-equity holdings.
Access Investments-Building Awareness - European Union-ROMANIA
Tuesday, November 29, 2011
Italy again had to pay investors yields averaging above 7% at its government bond auctions Tuesday, as the euro zone's third-largest economy continues to borrow at costs that forced Greece, Portugal and Ireland to seek external bailouts. The auction of up to €8 billion in bonds over a range of maturities saw Italy paying a yield of 7.89% on three-year bonds and 7.56% on 10-year paper. Both marked new euro-era highs. That Italy had to offer higher yields on shorter-dated bonds at Tuesday's sale underscores how investors want to be compensated for the risk attached to the country's near-term fiscal outlook. Demand at the auction totaled €10.9 billion, enough to safely cover the amount on offer. But the margin was still small; the bid-to-cover ratio on the 10-year sale, for example, totaled 1.34, up marginally from a slim 1.27 last month. Yields in the secondary market initially fell on the results, but the benchmark 10-year yield remained sharply higher on the day. "Italy does not have the ability to push down its funding costs to sustainable levels," said Jeffrey Sica, president and chief investment officer of SICA Wealth Management, which has more than $1 billion in client assets, real estate and private-equity holdings.
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"The sheer size of Italy's economy and bond market has taken the crisis to a whole new level and has been a key factor in the reassessment of the risks of a break-up of the bloc," said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consultancy specializing in sovereign credit risk. "Never before has the threat of an Italian default been more real."
While Italy runs a primary budget surplus, economic fundamentals like this "no longer have any importance," Mr. Spiro said. What is perhaps most worrying about Italy right now is "that the country is no longer a master of its own fate," he said.
The European Central Bank missed its target at its weekly operation to drain the volume of its bond purchases from the euro zone’s banking system, ECB data showed Tuesday.
The data suggest that banks are hoarding cash amid the euro zone’s intensifying debt crisis.
The ECB only drained EUR194.199 billion in its weekly operation, below the target of EUR203.5 billion. The target amount equals the total volume of purchases under the ECB’s program for buying euro-zone government bonds on the secondary market.
It is the first time that the ECB has missed the mark on a draining operation since May and only the sixth time since the ECB started its bond-buying program in May 2010. It is also the first time that the draining operation has failed since the ECB revived the program in August.
Following the announcement of the failed operation, the euro dropped against the dollar, reversing gains made earlier Tuesday after Italy’s debt auction.
The European Central Bank missed its target at its weekly operation to drain the volume of its bond purchases from the euro zone’s banking system, ECB data showed Tuesday.
The data suggest that banks are hoarding cash amid the euro zone’s intensifying debt crisis.
The ECB only drained EUR194.199 billion in its weekly operation, below the target of EUR203.5 billion. The target amount equals the total volume of purchases under the ECB’s program for buying euro-zone government bonds on the secondary market.
It is the first time that the ECB has missed the mark on a draining operation since May and only the sixth time since the ECB started its bond-buying program in May 2010. It is also the first time that the draining operation has failed since the ECB revived the program in August.
Following the announcement of the failed operation, the euro dropped against the dollar, reversing gains made earlier Tuesday after Italy’s debt auction.
Peter Chatwell, an Interest Rate Strategist at Credit Agricole CIB, said banks’ concerns about collateral may have prompted them to use their cash differently than they have in the past. Banks right now may “not want to give money to the ECB when there are [treasury] bills on offer and they can be used as collateral at the ECB.”
Though banks could get higher returns by depositing at the central bank, they are putting money instead in short-term instruments that they can use at the ECB as collateral to refinance, he said.
Banks are increasingly using the ECB as an intermediary. This is due to growing concern among banks about counterparties’ exposure to the euro zone debt crisis. Banks are borrowing at record levels from the ECB’s weekly main refinancing operation and also depositing funds at the ECB’s overnight facility at very elevated volumes.
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