Italian debt under pressure before year-end auction

Italian debt under pressure before year-end auction

WILLIAM JAMES AND MARIUS ZAHARIA

LONDON— Reuters

Published Tuesday, Dec. 27, 2011 11:08AM EST

Last updated Tuesday, Dec. 27, 2011 11:12AM EST

Italian government bond yields edged higher on Tuesday and were expected to rise further this week with investors growing nervous that thin liquidity may complicate Rome’s plans to sell €8.5-billion worth of debt.

In choppy trade, 10-year Italian bond yields rose as much as 11 basis points on the day to 7.13 per cent, before recovering some ground, with more pressure seen likely ahead of three- and 10-year debt auctions on Thursday.

“The 10-year is the area where Italy has to rely more on foreign investors and it will be very tough to sell especially at this point in the year, so I expect further cheapening of the bond going into the auction,” ING rate strategist Alessandro Giansanti said.

“The three-year would be easier to sell, there is some demand from the domestic investors. If they see really weak demand in the 10-year ... they may sell more short-term (debt).”

The 7 per cent level is roughly the threshold beyond which other euro zone governments have been forced to seek bailouts and markets will get increasingly nervous if yields stay above it for a prolonged period when trading picks up early next year.

Key concerns for the market will resurface in January, with many still looking for policy makers to put in place sufficient measures to insulate Italy from the debt crisis.

Politicians agreed landmark steps towards fiscal union earlier this month. But with the ECB still refusing to ramp up its bond-buying program and efforts to provide aid through the IMF making limited progress, some see considerable risks for that Italy will struggle to refinance its large maturing debts.

“As we head into Q1 we will see a lot of refinancing by the banking system and sovereigns. That will be a litmus test of where we stand. For the moment we’re not yet in the safe area,” said Elwin de Groot, senior market economist in Utrecht.

Safe-haven Bund futures rose 47 ticks to 138.02 while 10-year German yields fell 3.5 basis points to 1.92 per cent with wide bid/ask spreads highlighting poor liquidity.

The 38 per cent Fibonacci retracement of the November-December rally at 136.72 was expected to offer strong support for the March Bund future, with December’s high at 138.86 the next target on the upside, technical analysts said.

Two-year Schatz yields hit fresh record lows at 0.163 per cent, with safe-haven bids and massive excess liquidity in the euro system driving short-term rates lower.