Bloomberg News

Tumbling Bonds Make Sales Harder for Italy, Spain: Euro Credit

September 26, 2011

(See EXT4 for more on the European debt crisis.)

Sept. 26 (Bloomberg) -- Spain and Italy face a tricky final quarter among the euro-area nations with most bonds left to sell as they try to lure investors amid falling prices.

The European Central Bank began purchasing securities of the region’s third- and fourth-largest economies on Aug. 8 after debt-crisis contagion sent borrowing costs up to euro-era records. Still, Italy and Spain may have to trim supply, count on investors to reinvest maturing-bond proceeds and use cash raised from state-asset sales to see them through the final three months of the year, strategists at Barclays Capital and UBS AG said.

“The next quarter will be very difficult for Italy and Spain -- every single auction will be scrutinized,” said Nicola Marinelli, a London-based fund manager at Glendevon King Asset Management, which oversees $153 million. “If the market knows you have to refinance in this kind of environment, then it is going to be tough. If there is any hint that the ECB isn’t standing behind the bonds, then the auctions will be disasters.”

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds, the region’s benchmark government securities, widened to 418 basis points on Aug. 5, the most since the euro was introduced in 1999. The Italian-German 10-year spread reached a record 416 basis points the same day and the Spanish spread climbed to 374 last week, the most since before the ECB began buying the debt, while Italy’s rose to 413.

Planned Sales

Italian 10-year yields were two basis points higher at 5.64 percent today, while Spain’s were little changed at 5.20 percent.

Italy has 27 percent of its planned 226 billion-euro 2011 bond issuance outstanding, while Spain has 30 percent of an estimated 93.8 billion euros still to auction, according to Credit Suisse Group AG. The average of the eight euro-region issuers tracked by the bank is 22 percent. AAA-rated Finland and Germany have 28 percent and 27 percent remaining.

Belgium and France are best placed, according to the Zurich-based bank’s calculations, with 12 percent and 9 percent left, respectively.

“It’s going to be a very tricky autumn for Italy and Spain, with yields at an uncomfortable sort of level,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “They will be able to get the funding away, with the privatizations and the help of the ECB.”

‘Nervous’ Markets

He said Italy may cut the amount it needs to fund to the “bare minimum” 215 billion euros. The nation needs to hold 10 auctions in the fourth quarter, while Spain must hold six, according to strategists at Commerzbank AG.

“Every time there is an auction, the market tends to become particularly nervous,” said Gianluca Ziglio, a London- based interest-rate strategist at UBS AG. “In Italy, we have seen a significant drying out of demand. Their bonds are at risk of further underperformance.”

Italy has sold more than 44 billion euros of bonds and bills since Aug. 8. Demand has fallen during that period, with investors bidding for 1.53 times the amount of securities on offer at a 7.5 billion-euro auction of one-year bills on Sept. 12, down from 1.94 times at a sale of similar-maturity securities on Aug. 10. Average yields rose to 4.153 percent from 2.959 percent.

Investors ‘Burned’

The nation sold 3.75 billion euros of a new 10-year benchmark maturing in March 2022 on Aug. 30 at a price of 98.75, according to Bloomberg Bond Trader Prices. That had fallen to 93.935 by Sept. 23, even as people familiar with the transactions said the ECB had stepped in to buy the nation’s securities in the secondary market.

“It’s hard to see that the same investors who have been burned over the course of the past month will be happy to pick up fresh paper at these now lower prices,” said David Schnautz, a fixed-income strategist at Commerzbank in London. “The market is getting more and more worried that this is an unsustainable situation. Each time there is more supply, those concerns are boosted.”

Spain has sold more than 20 billion euros of bonds and bills since Aug. 8. Borrowing costs and demand rose at a Sept. 20 sale of 4.46 billion euros of 12-month and 18-month bills, compared with similar sales on Aug. 16.

The nation has 30 billion euros of bonds maturing before the end of the year, Ziglio said. Redemption money is usually reinvested in the same market, which should be supportive for fourth-quarter issuance, he said.

Stake Sales

Spain’s plan to sell stakes in assets including its airports and lottery should raise about 8 billion euros to 10 billion euros, according to Worthington and “may bring the nation’s target for the year down a bit so they aren’t under so much pressure.”

Additionally, the nation’s official agencies, whose bonds are guaranteed by the government, need to raise more than 10 billion euros in the primary market before the end of the year, Commerzbank strategists said.

Italy is scheduled to auction 3.5 billion euros of zero- coupon bonds maturing in 2013 as well as 11 billion euros of 76- day and 182-day bills on Sept. 27, 750 million euros of 2019 inflation-linked bonds on Sept. 28 and securities maturing in 2014, 2015, 2021 and 2022 on Sept. 29. Spain plans to sell three- and six-month bills on Sept. 27.

“Italy and Spain both have to come back to the market at least twice a month until the end of the year,” Commerzbank’s Schnautz said. “There will be ongoing pressure for both countries and there won’t be much time for a break.”

--With assistance from Keith Jenkins and Matthew Brown in London. Editors: Mark McCord, Mark Gilbert

To contact the reporter on this story: Emma Charlton in London at

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

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