Monday, February 14, 2011

Italian Auction Bodes Well for Portugal

By Emese Bartha, WSJ

Italy Monday sold close to the maximum intended amount in five- and 30-year government bonds, known as BTPs, at somewhat higher yields than previously, confirming steady investor demand for the country's debt and sending a cautiously positive signal for Portugal and Spain, which will sell government debt later this week.

The Italian auction was "another confirmation" that the country doesn't face any immediate problems in funding itself, said Jan von Gerich, senior analyst at Nordea in Helsinki. "The successful Italian auctions pave the way for the Portuguese and Spanish auctions later this week, while these auctions shouldn't face any bigger hurdles either," he said.

Italy offered €3.75 billion ($5.08 billion) to €5.25 billion of the 3% Nov. 2015 and 5% Sept. 2040-dated BTPs, and sold €5.176 billion—the maximum planned €3.5 billion in the five-year BTP and €1.676 billion in the ultra-long one.

The yields increased from previous auctions, held Jan. 13, 2011 and Sept. 13, 2010, respectively, although the yield on the closely watched five-year BTP has only ticked up 0.1 percentage point to 3.77% from 3.67%. This increase reflects investors' new confusion over future bailout rules, rather than Italy-specific fears, analysts said.

The yield rise for the ultra-long bond was a bigger 0.71 percentage points, to 5.51% from 4.80%, but one has to bear in mind that the previous tender took place before the repricing of euro-zone debt in the autumn before Ireland's bailout.

The bid-to-cover ratios, which show how demand compares with the amount sold, came in at 1.4 versus 1.41 previously for the November 2015 BTP and 2.06 versus 1.73 for the September 2040 BTP.

The bonds on offer had been considered as cheap versus the two- and 10-year segments of the Italian curve, so offering incentives for potential buyers. Citigroup analysts had also noted that the Italian 5/10-year yield spread has flatted to historically attractive levels relative to Spain during last month.

"Some concession was given ahead of today's auction and it is likely to have supported total bids," said Annalisa Piazza, an economist at Newedge in London. She added that the "very good demand" for Italian paper is a sign that, despite renewed pressure on euro-zone peripheral issuers, "market dealers are still taking advantage of interesting spreads to buy relatively 'safe' peripheral debt."

Italian bond yields trade significantly below those of Portugal, still seen by many as a bailout candidate, despite its relatively smooth fund-raising this year to date and its advanced funding completion as well.

But Italian yields also trade below those of Spain. Deutsche Bank analysts say Italy's funding fears aren't currently a source of concern, although March and September will be the heaviest in terms of funding needs, totaling €67 billion and €69 billion, respectively, to fund government-bond and Treasury-bill redemptions, as well as the budget deficit.

"In terms of the sovereign funding needs, in our opinion, Italy should remain in a fairly manageable position throughout the year," said Deutsche Bank analysts, and doesn't need to "over-issue" in early 2011.

Portugal will sell €750 million to €1 billion of 12-month T-bills Wednesday, and the same day it will buy back bonds maturing in April 2011 and June 2011. These bonds have outstanding volumes of €4.532 billion and €4.958 billion, respectively.

Spain will auction the 4.85% Oct. 2020 and 4.20% Jan. 2037 bonds Thursday for an amount to be announced later Monday.

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