Italy's borrowing costs jump

Italian three-year borrowing costs jumped to 3.89 per cent at a bond auction today, a rise of more than one percentage point compared with a month ago and the latest sign markets are unconvinced that Europe is on top of its debt problems.

Budget troubles in Spain and concerns about slowing global growth have turned the spotlight back on Italy's €1.9 trillion debt and a bond rally driven by a liquidity injection by the European Central Bank has given way to profit-taking.

The 3.89 per cent Italy paid to sell its three-year March 2015 bond compared with 2.76 per cent in mid-March. A day earlier, Italy's one-year borrowing costs doubled in an auction.

"The funding environment is getting tougher for the periphery. Overall we believe the spreads are biased towards further widening although we still prefer Italian debt over Spanish," said Michael Leister, a strategist at DZ Bank.

Today’s increase brings three-year auction yields to their highest level since mid-January.

In a more reassuring sign, however, the Treasury raised €4.88 billion at the sale - just shy of its maximum planned amount of €5 billion.

Italy's 10-year yield gap against Germany tightened slightly after the auction to 379 basis points, from 384 basis points ahead of publication of the results.

"It sold nearly the top amount, this is undoubtedly positive," said ING strategist Alessandro Giansanti.

Italian officials have blamed external factors - an oblique reference to Spain - for the rise in yields and dismissed suggestions the slow progress of structural reform, including new labour rules, have put off investors.

Today’s auction was seen benefiting from reinvestment flows from €15 billion of Italian BTP, or fixed-rate, bonds maturing mid-April.

Italy also sold three off-the-run bonds due in 2015, 2020 and 2023. It was the first time since last October Italy issued a bond with a maturity longer than 10 years. Traders said these lines had been specifically requested by primary dealers.

The Treasury sold the maximum planned amount of €2 billion for the three lines, and the sale was more than twice covered.

The Treasury has repeatedly said it wants a lasting improvement in market conditions before it starts issuing longer term debt again. Such bonds have benefited less than shorter-maturities from the ECB's liquidity largesse.

Reuters