Bloomberg News

Italian, Spanish Bonds Fall After Italy Auction, Austerity Vote

July 14, 2011

July 14 (Bloomberg) -- Italian government bonds declined after borrowing costs rose to a three-year high at a sale of five-year securities today.

Greek bonds fell as Fitch Ratings cut the nation’s credit rating three levels to CCC and said default is a “real possibility.” Ireland’s yields reached records, while Spanish bonds fell. Italian Prime Minister Silvio Berlusconi won a Senate confidence vote on an austerity package aimed at taming the nation’s 1.8 trillion euro ($2.6 trillion) debt burden.

“The supply is out of the way, but the picture remains unchanged,” said Michael Leister, a fixed-income analyst at WestLB AG in London. “We have still the unresolved Greek situation and contagion worries, and the risk that Italy may run into a self-sustaining spiral of funding costs. The market is pretty worried.”

Italian 10-year yields climbed nine basis points to 5.63 percent at 4:24 p.m. in London. The 4.75 percent security maturing in September 2021 fell 0.66, or 6.6 euros per 1,000- euro face amount, to 93.82. The nation’s two-year note yields climbed five basis points to 4.11 percent.

Italy sold just under 5 billion euros of four different bonds with maturities ranging from five to 15 years today.

The Treasury priced 1.25 billion euros of five-year bonds, the maximum set for the sale, to yield 4.93 percent, the highest since June 2008. That’s up from 3.9 percent at the previous auction on June 14.

Greek Downgrade

It was the first sale of longer-term debt since Italy’s 10- year yield reached a 14-year high of 6.02 percent on July 12. Italy also sold 1.72 billion euros of bonds maturing in 2026.

A market sell-off that sent stocks sliding and Italian 10- year yields surging to 6 percent this week has led Prime Minister Silvio Berlusconi to push for speedy passage of 40 billion euros in deficit cuts to balance the budget in 2014. Today’s positive vote paves the way for the final passing of the plan tomorrow.

“The market expected a better outcome from the auction,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. The “discussions on Greece are increasing uncertainty, so no investor is really willing to take on a lot of risk.”

Officials from the European Central Bank, the European Commission and private lenders are set to meet in Rome today to discuss the involvement of private investors in a second rescue plan for Greece, an Italian Treasury official said.

Greek Rescue

German 10-year yields were little changed at 2.74 percent, while Greek yields of the same maturity were 12 basis points higher at 17.10 percent.

Fitch said late yesterday it downgraded Greece because of the uncertainty surrounding a second aid package and the role of private creditors in future funding.

More than a year after Greece received a 110 billion-euro aid package that aimed to stem the spread of the region’s sovereign-debt crisis, EU officials are trying to put together a second rescue package as the country remains locked out of bond markets and contagion pushes up yields on bonds from other high- debt and deficit euro-region nations. Ireland and Portugal have also received external funding for their debt burdens.

Spanish 10-year bonds fell, pushing the yields up four basis points to 5.86 percent. The yield spread between 10-year Spanish bonds and similar-maturity German bunds widened four basis points to 311 basis points.

Irish Market Access

Ireland’s 10-year yield rose as high as 14.13 percent before slipping to 13.95 percent after the nation’s Finance Minister Michael Noonan said the country has met its fiscal targets as part of a review of its bailout program.

International Monetary Fund Deputy Director Ajai Chopra said Ireland has a “good chance” of returning to markets if broader issues in Europe are addressed.

“The fiscal program is very much on track and the government has developed a great deal of fiscal credibility,” Chopra said in Dublin today after the IMF, European Commission and ECB reviewed Ireland’s budget plans. “If it wasn’t for contagion we’d be seeing a different result. The country needs to be judged by its own merits” and has “good prospects of market access.”

German government bonds have handed investors 1.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, while Treasuries have returned 3.8 percent. Greek bonds have lost more than 20 percent, while Italy’s bonds have lost 2.1 percent, the indexes show.

--With assistance from Keith Jenkins in London. Editors: Matthew Brown, Keith Campbell

To contact the reporters on this story: Emma Charlton in London at; Garth Theunissen in London at

To contact the editor responsible for this story: Daniel Tilles at

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