Experimental feature Report a mispronounced word Investors shrugged off political wrangling between the Italian government and the European Commission on Thursday, as auctions for the country’s bonds were met with solid demand. Italy issued €2.75bn of 10-year bonds at a yield of 3 per cent and €1.89bn of 5-year bonds at a yield of 1.75 per cent, along with smaller amounts of debt indexed to the Euribor rate. Demand for the 5-year bond was the highest since August last year, as judged by the amount of bids received versus the amount sold. The so-called “bid-to-cover ratio” came to 1.78 times, up from 1.52 a month ago. The overbidding came despite a warning to Rome’s coalition government from the European Commission on Wednesday, over the country’s mounting debts. The commission is obliged to contact eurozone governments which have debts higher than a mandated limit of 60 per cent of gross domestic product, and which are not showing signs of sticking to agreed targets. “Italy is confirmed not to have made sufficient progress towards compliance with the debt criterion for 2018,” the letter said. Bankers close to Thursday’s deal dismissed the EC’s intervention. “It would be extraordinary if this new commission would think [fining Italy] is the right thing to do,” said one banker involved in the auction. “Nobody has ever been fined by this, and nobody expects there will be such a fine,” the banker added. “If the commission were to get into a conflict, that would send bad signals to the market, but that’s not going to happen.” He added: “This letter is backward looking rather than forward looking and the market discounts that.” The yield on Italy’s 10-year bond fell to 2.59 per cent on Thursday before rising to 2.65 per cent after deputy prime minister and leader of the rightwing League party Matteo Salvini ruled out early elections, saying that the coalition was focused on preparing the 2020 budget in September. Italy’s popularity with investors rests on the relatively high yields offered by its debt market. The eurozone’s waning economic outlook, along with the European Central Bank’s commitment to hold interest rates steady until at least the end of 2019, has compressed yields on government bonds across the bloc. “The letter and [the] European Commission, that’s all going to be important but [the bonds] still offer you a very attractive yield,” said another banker close to the deal, who spoke on condition of anonymity. “The [return] in the curve is way better than for other bonds in the eurozone.” Chiara Cremonesi, fixed-income strategist at UniCredit, noted that demand was “more tepid” for the 10-year bonds, as the premium over prices in the secondary market was more modest. “The 10-year area is quite expensive versus the shorter and the longer end, so this might be one of the reasons,” she said, adding: “[Italian government bonds] were performing well after the auction, which confirms supply has been easily absorbed.”
