Italian borrowing cost on short-term bonds decreases

ITALY’S THREE-YEAR borrowing costs fell at a fully subscribed €5.25 billion auction yesterday morning despite an overnight ratings downgrade by Moody’s.

In the early hours of yesterday morning, the US ratings agency slashed Italy’s sovereign debt rating to Baa2 – two notches above junk status – citing doubts over the country’s long-term resolve to push through much-needed reforms. Moody’s also said persistent worries about Spain and Greece were increasing its liquidity risks.

The European Commission responded yesterday by saying it had doubts about the wisdom of Moody’s decision to cut Italy’s debt rating so close to the auction, and praised Rome’s efforts to put its finance in order. “I do think one can legitimately and seriously question the timing of it, whether the timing was appropriate,” commission spokesman Simon OConnor said yesterday.

Despite the downgrade, solid domestic demand helped the Italian treasury sell the planned amount of €5.25 billion in bonds, paying less than a month ago on three-year paper.

“This was a challenging enough auction without the downgrade which makes the result look all the more impressive,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy. “Once again, the Treasury was able to get its debt out the door, which right now is the overriding priority.”

A new 2015 bond was sold at an average 4.65 per cent rate, compared with the 5.30 per cent Italy paid in June just before a cliffhanger Greek vote that had stoked fears of a euro exit and soon after an unconvincing first deal to help Spanish banks.

Italian banks’ commitment to support Rome’s refinancing of its €2 trillion debt and a broad domestic investor base have provided a safety net for Italy throughout the crisis. Foreign investors’ reluctance to hold Italian debt, however, keeps the yields under pressure. Although Italy’s shorter-term funding costs fell, the country’s 10-year bond yield broke through 6 per cent.

Merrion Stockbrokers economist Alan McQuaid said investors are now putting their money into shorter-term paper.

“Markets are still very, very nervous,” he said. This is reflected in the fact that there is a bigger demand for short-term paper even though the return on longer-term investments is greater, he said.

“Because of the greater risk, people are just a little bit nervous,” he added.

Also, following the decision by the European Central Bank to cut its overnight deposit rates to zero on Wednesday, banks have been moving money into short-term bonds. As a result, two-year yields have turned negative in highly rated countries such as Germany, Holland and Austria.

“All that money has been moving into shorter-term paper in these countries,” Mr McQuaid said.

Similar-maturity Belgian yields dropped as low as 0.302 per cent and French yields reached 0.107 per cent. Yields on Finnish securities also fell to a record yesterday. – (Additional reporting: Reuters, Bloomberg)