Italy bids to raise money in market without ECB safety net
Italy will attempt to raise money in the bond market this week without the safety net of buying by the ECB, which has restrained the nation's borrowing costs for three weeks by buying its debt.
The euro's founding treaty bars the central bank from buying bonds directly from governments, meaning it can only provide secondary market support. As well as €3.75bn of 10-year securities to create a new benchmark, Italy is marketing €4.25bn of bonds maturing in 2014 and 2018, with Spain and France also planning sales.
"This is where the litmus test comes, the test to see whether the ECB's buying power can hold yields where they are," said Shahid Ikram, head of sovereigns at London-based Aviva Investors, which has some of its $440bn of assets invested in Italian bonds.
"From a risk-return perspective, there's a great deal of uncertainty. You are going to see more volatility in the Italian yield, some concession will be required and then it's just a case of what real demand there is."
The ECB began buying Spanish and Italian government bonds on August 8 to stop the debt crisis from spreading to the euro region's third and fourth biggest economies. The purchases brought the nations' 10-year bond yields down to about 5pc from euro-era records, even as Europe's leaders disagreed over how to contain the turmoil.
Italian 10-year bonds yielded 5.09pc, after reaching a euro-era record 6.4pc on August 5 and sliding more than one percentage point to 5.02pc in the five trading days after the ECB began buying. Both Aviva's Ikram and Werner Fey, a fund manager at Frankfurt Trust Investment GmbH in Frankfurt, which oversees about €6.5bn euro of fixed-income assets, said they won't be buying at this Italian auction.
"The problem for fund managers is that there is huge volatility and big event risk," Fey said. "The politicians are not coming up with a solution. There's a risk the ECB may end its programme and there will be a massive hit on Italian paper.
"You cannot exclude that the market will test the Italian bond yield highs again," he added