Bloomberg News

Italian Bonds Slide as Demand Falls at Sale; Greek Debt Slumps

September 13, 2011

Sept. 13 (Bloomberg) -- Italy’s bonds fell, with two-year yields rising to the highest since before the European Central Bank began buying the nation’s debt last month, as concern the debt crisis is worsening sapped demand at a note sale today.

Greek two-year notes slid for a 10th day, pushing yields toward 77 percent, as credit-default swaps showed the nation has a 98 percent chance of default in the next five years. Italy sold 3.9 billion euros ($5.3 billion) of five-year notes at an average yield of 5.60 percent, up from 4.93 percent at the previous auction of similar-maturity debt in July. Demand dropped to 1.28 times the amount on offer, from 1.93 times.

The auction “wasn’t particularly inspiring,” said Eric Wand, a bond strategist at Lloyds Bank Corporate Markets based in London. “There aren’t many investors out there who are willing to put their money on the table. Until policy makers come up with the goods, people are going to continue to shun peripheral paper.”

Italian two-year note yields rose 14 basis points to 4.65 percent at 4:35 p.m. in London, after climbing to 4.81 percent, the most since Aug. 5. The 4.25 percent security due in August 2013 fell 0.235, or 2.35 euros per 1,000-euro face amount, to 99.385. Five-year rates climbed 17 basis points to 5.32 percent, and 10-year yields gained 13 basis points to 5.70 percent.

Italy had originally planned to sell a maximum of 4 billion euros of new benchmark five-year notes. It also auctioned 2.6 billion euros of securities due in 2018 and 2020.

ECB Buying

Italian borrowing costs increased even as the ECB bought the nation’s debt in the secondary market, according to three people with knowledge of the deals who declined to be identified because the transactions are confidential. A spokeswoman for the Frankfurt-based ECB declined to comment on the purchases.

“If the ECB hadn’t intervened, yields would have been a lot higher” at the auction, Lloyds’ Wand said.

The ECB began buying Spanish and Italian bonds on Aug. 8 to curb a surge in yields as contagion from the debt crisis that engulfed Greece, Ireland and Portugal spread to the two larger economies. The central bank said yesterday it settled 14 billion euros of debt purchases last week, up from 13.3 billion euros the previous week.

Spanish 10-year bond yields added six basis points to 5.38 percent after rising as much as 11 basis points to 5.44 percent, the highest level since Aug. 8. The nation is scheduled to sell securities maturing in 2019 and 2020 on Sept. 15.

Rate Outlook

The ECB left interest rates at 1.5 percent on Sept. 8, after increasing its main refinancing rate by 25 basis points on April 7 and July 7, from a record low 1 percent.

A Credit Suisse Group AG index based on swaps shows traders are betting the ECB will lower its benchmark by 24 basis points during the next 12 months. As recently as Aug. 1, the index forecast an increase of 25 basis points.

German bunds fell, reversing earlier gains. The yield on the 10-year security climbed four basis points to 1.78 percent, after dropping to 1.679 percent, the lowest since the euro was introduced in 1999. Two-year note yields advanced seven basis points to 0.50 percent.

Germany plans to sell 5 billion euros of two-year notes tomorrow.

Greek two-year yields jumped 718 basis points, or 7.18 percentage points, to a euro-era record 76.73 percent. The yield has surged more than 19 percentage points since last week, when it closed at 56.98 percent, according to Bloomberg data. Ten- year bond yields climbed 109 basis points to 24.63 percent, after increasing to an all-time high 25.01 percent.

‘Edge of the Abyss’

Credit-default swaps insuring $10 million of Greek debt for five years now cost $5.8 million upfront and $100,000 a year, up from $5.5 million in advance on Sept. 9, according to CMA.

Similar contracts on Belgium, France, Italy, Portugal and Spain also rose to records, CMA data show. An increase signals deterioration in perceptions of credit quality.

“Greece is absolutely on the edge of the abyss,” said John Davies, a fixed-income strategist at WestLB AG in London. “No one really knows whether the next tranche of aid is coming. The market is understandably extremely worried.”

German Chancellor Angela Merkel said Greece is taking the right steps to get its next bailout payment, warning against allowing a Greek default because of the risk of contagion for other euro-area countries.

Merkel, in a German radio interview broadcast today, said an “uncontrolled insolvency” would further roil markets spooked by the prospect of a Greek default. The euro region currently has no system for “orderly” insolvency until the permanent rescue fund is established in 2013, she said.

German government bonds have returned 8.3 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Italian government bonds have lost 3.3 percent and Greek bonds have slumped 38 percent the indexes show.

--With assistance from Abigail Moses and Gabi Thesing in London. Editors: Matthew Brown, Nicholas Reynolds

To contact the reporters on this story: Emma Charlton in London at; Keith Jenkins in London at

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

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