Italy 3-Year Yield Slides at Auction

Lowest yield in almost two years follows German court's OKing ECB bond-buying program.

Italy sold three-year debt at the lowest rate in almost two years, a day after Germany’s top constitutional court paved the way for the European Central Bank and the European Union to buy bonds of nations in distress.

The Rome-based Treasury sold 4 billion euros ($5.2 billion) of its benchmark three-year bond to yield 2.75 percent, down from 4.65 percent at the last auction of the same securities on July 13. That was the lowest Italy paid on three-year debt since October 2010, according to Bloomberg data. Investors bid for 1.49 times the amount offered, down from 1.73 times on July 13.

“In a word, storming demand, full volume sold, with yields struck at auction well below secondary market levels, and cover strong, at least by Italian standards,” Marc Ostwald, a fixed- income strategist at Monument Securities Ltd. in London, said in a note to investors. “This really does highlight how much good news is now being priced into the peripheral markets on the back of the OMT, the German ESM ruling and also hopes for QE3 today.”

The bond auction was the first for Italy since the ECB’s announced on Sept. 6 its Outright Monetary Transactions program to make unlimited purchases of sovereign bonds, which led to a plunge in borrowing costs of distressed debt in Spain and Italy. The sale also came a day after Germany’s Federal Constitutional Court ruled the government can ratify the euro-region’s permanent bailout fund, the European Stability Mechanism, a decision that could pave the way for EU and ECB bond buying.

Italy’s 10-year bond yield rose 2 basis points to 5.06 percent at 12:35 p.m. in Rome, leaving the difference with comparable maturity German bunds at 345 basis points.

Italy also sold 1 billion euros of five-year debt today at 3.71 percent and 1.5 billion euros of bonds due in 2026 at 5.32 percent, the longest-maturity bonds sold this year. The sale came two days before 10.4 billion euros of bonds mature. Italy auctioned 12 billion euros of Treasury bills yesterday.

Prime Minister Mario Monti, who reiterated this month that Italy doesn’t plan to request bond buying for now, called yesterday’s ruling “excellent news.” He also said conditions in the court’s decision won’t slow efforts to lower yields.

“I think the sentence only says that to increase the total commitment of Germany the two houses of parliament have to intercede,” Monti told reporters in Rome yesterday. “That doesn’t seem surprising to me.”

Italy’s 10-year bond yields fell to the lowest in April yesterday and have declined more than 50 basis points since ECB President Mario Draghi gave details of the Frankfurt-based bank’s plans to buy bonds in tandem with the ESM to try to lower borrowing costs.

Italy’s total government debt declined in July for the first time in five months, the Bank of Italy said in a separate report today. The debt load decreased to 1.967 trillion euros from 1.973 trillion euros in June. Even with that fall, Italy’s total borrowing is the euro region’s second largest in nominal terms after Germany.

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