Saturday 23 September 2017

Positive ECB noises push down cost of Italy's funding

Valentina Za

Italy's 10-year funding costs fell below 6pc for the first time since April at an auction yesterday as expectations that the European Central Bank may ride to the rescue of vulnerable eurozone members spurred demand for their debt.

Cautious investors, however, still kept Italy's cost of borrowing at levels which exact a heavy toll on the country's public finances as uncertainty remains over the timing and nature of any further action ahead of an ECB meeting on Thursday.

Italy sold €5.48bn in bonds, near the top of its planned issue range. Benchmark 10-year borrowing costs fell to 5.96pc from 6.19pc at a similar auction a month ago.

By comparison, higher-rated Belgium saw 10-year bond yields fall to 2.62pc yesterday.

"On balance, not an unreasonable set of results," Richard McGuire, a rate strategist at Rabobank in London, said.

"Despite the welcome dip in yields, though, Italy's cost of borrowing remains decidedly elevated . . . Overall, then, while these sales do provide some indication of an easing of tensions at the periphery, they also show considerable further progress is needed."

Italy's five-year bond yields fell to 5.29pc at yesterday's auction from 5.84pc a month ago. The treasury also sold €750m of a three-year bond no longer issued on a regular basis.

Elevated

Both five- and 10-year auction yields hit their lowest since April but remain elevated, contributing to debt servicing costs which analysts see running close to the €84bn pencilled in by the government for 2012.

Spanish and Italian yields retreated from peaks hit early last week after ECB president Mario Draghi said last Thursday that he would do whatever was necessary to defend the single currency.

Similar expressions of commitment to the euro by the leaders of Germany, France and Italy have reinforced expectations for steps to support Italian and Spanish bond markets.

Burdened with a €2trn debt and in the grip of recession, Italy has seen its debt costs track Spain's higher as Madrid struggles to retain market access amid budget troubles.

Should Madrid seek further aid, investors' attention would turn to Italy, whose economy is twice that of Spain's and whose funding needs are much larger. (Reuters)

Irish Independent

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