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Bond demand down and yields up in yesterdays auction in Italy
09/14/2011 12:03 pm EST
First, the surface. Italy sold 3.9 billion euros (roughly $5.5 billion) in five-year notes. But at a higher interest rate—5.6%--than at the last sale on July 14 for similar maturities—4.93%. Demand was lower than expected at 1.28 times the amount offered, down from 1.93 times the offering amount at the July sale.
Second, the deeper and uglier picture.
The European Central Bank began buying Italian government debt on August 8 and that buying had pushed the yield on the 10-year Italian government bond below 6% from a euro-era high of 6.4%. After yesterday’s auction the 10-year yield climbed 16 basis points to 5.74%. (100 basis points equal one percentage point.)
Demand would have been even lower, bond traders say, except that hedge funds on the short-end of credit default swap deals were buying yesterday in order to cover those positions. That’s a reaction to how risky the credit default swap market has become with worries rising that not every counter party will be able to honor its contract in case of a default. And it’s certainly not a vote of confidence in Italy’s debt since the buying was prompted by fears that someone would actually have to pay off on this default insurance.
And, unfortunately, yesterday’s sale wasn’t Italy’s last auction for the year. Projections are that Italy needs to sell at least 60 billion euros (or $84 billion) in bonds during the remainder of 2011.
Today, September 14, the European Central Bank is back in the market buying Italian government debt. The yield on the 10-year Italian bond is down to 5.62% as of 11:30 New York time.
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