EU's bruised periphery passes first real test this year of appetite for bond sales
SPAIN and Italy spread some much-needed cheer through eurozone markets yesterday with solid debt auctions at sharply lower borrowing costs.
It was the new year's first real test of appetite for bond sales by the eurozone's bruised periphery.
Much of the result reflected the success, at least for now, of what amounts to a back-door bailout by the European Central Bank, which has lent nearly half-a-trillion euro of three-year money to banks.
The Spanish treasury raised €10bn from the auction of three bonds, doubling its target, and yields dropped by about one percentage point.
Italy also fared well, paying less than half what it did a month ago to sell one-year bills at its first auction of the year.
Domestic banks in Spain and Italy continued to lend support thanks to ultra-cheap funding from the ECB, which provided banks with nearly half-a-trillion euro of three-year money late last year and will make a similar offer in February.
"Basically the only reason this has been taken down so well is abundant ECB liquidity and with another one coming up in February, just for now the market seems very complacent," said Michael Leister, strategist at DZ Bank in Frankfurt.
With the ECB money borrowed cheaply at just 1pc, banks can buy government bonds with the same maturities from troubled eurozone sovereigns, exploiting the sharp difference in yields.
French President Nicolas Sarkozy has urged them to do so but until now analysts had not expected it to amount to much.
Spain's risk premium, the spread between the yields on Spanish and German benchmark bonds, narrowed to its tightest level since January 3 and the 10-year yield spread between Italian and German bonds fell below 500 basis points.
"As tactics go, it is clear that getting as much done as quickly as possible in terms of funding a deficit is wise," said Marc Ostwald, rate strategist at Monument Securities in London.
The yield on Italian 12-month bills fell to 2.735pc, from the near 6pc Italy paid to sell one-year paper at a mid-December auction and marked the lowest level since June 2011.
Italy will launch its 2012 bond issuing campaign today when it offers up to €4.75bn of debt including its three-year benchmark and two off-the-run issues. The glut of ECB money may well give that sale a fair wind too.
Spanish local media attributed the auction's success to tough cost-cutting measures announced by new Prime Minister Mariano Rajoy. His centre-right People's Party re-tweeted a headline from rightist newspaper ABC: 'Success for Rajoy's measures in the auction'.
But analysts said politicians will remain under close scrutiny this year and questioned how long domestic banks would be willing to hold medium-to longer-term government debt, underlining the need for decisive eurozone-wide moves to end the crisis. (Reuters)