Italian bond yields jump at auction

Italy had to pay the highest interest rates in three years to sell almost €5 billion of long-term debt today, highlighting the growing pressure on the public finances of the euro zone's third largest economy.

Italian stock markets fell after the tender and its bonds weakened slightly compared with German Bunds, with the treasury forced to pay gross yields of 4.93 per cent and 5.9 per cent respectively to issue new five and 15-year debt.

Italy, which has one of the world's biggest public debt burdens, has moved to the eye of the storm in Europe's debt crisis over the past week, with investors driving up its cost of borrowing and dumping shares in its banks.

At €4.97 billion, the amount sold was just under the treasury's maximum target of €5 billion - a sign demand for Italian debt remains solid.

But analysts said the rise in borrowing costs would be unsustainable in the long term. "While the auction will most likely be spun as a success, there are some worrying signs and Italy won't be able to continue to have debt auctions like this indefinitely," said Kathleen Brooks, research director at Forex.com.

Italy's debt is around 120 per cent of its gross domestic product, second only to Greece in the euro zone.

The premium investors demand to hold Italian 10-year bonds instead of safe-haven German Bunds rose above 300 basis points after the sale, from around 294 basis points before the auction.

That spread widened to a euro lifetime high of 353 basis points on Tuesday, before narrowing back as moves by the Italian government to speed up passage of a €47 billion austerity package helped calm markets.

Still, current levels compare with a spread of 220 basis points a week ago, before the market sell-off started.

"A look at the outright yield levels is eye-watering," said David Schnautz, a rate-strategist at Commerzbank in London.

The Bank of Italy warned yesterday that a one percentage point increase in Italy's borrowing costs adds 3 billion euros to interest payments in the first year, and more after that.

Up to €3 billion in new tranches of five- and 15-year benchmarks and up to €2 billion of two off-the-run bonds were up for sale.

The 4.93 per cent gross yield on the five-year BTP was the highest since June 2008, and up from 3.90 per cent in the last auction a month ago.

The 15-year benchmark drew bids 1.49 times the amount offered and a gross yield of 5.90 per cent, the highest since the first 15-year bond was issued in 2002.

A technical glitch at the Bank of Italy meant that the results of the auction were initially released piecemeal by phone and fax instead of the usual automated release.