The banking system can’t fund all the euro member nations under current regulatory restrictions, including capital requirements and diversification rules.
The 3 year variable rate funding from the ECB may have helped some banks with room on their balance sheets, but with general liquidity concerns, buy more national govt debt, but that would be a one time adjustment. Once the banking system is ‘topped off’ it only buys more national govt bonds to replace maturing issues, or to add to its balance sheet should its capital increase.
Italy Bond Auction Fails to Match Spain Success
By Valentina Za
Jan 25 (Reuters) — Italy’s three-year debt costs fell below 5 percent but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.
Italy raised the maximum planned amount of 4.75 billion euros at the auction but did not live up to market expectations raised by a Spanish tender on Thursday where Madrid raised 10 billion euros, twice the planned amount, at lower rates.
Both Italy and Spain are benefiting from half a trillion euros of cheap three-year funds the European Central Bank injected into the banking system in an unprecedented move last month. Investors, however, remain more cautious towards Rome in the light of its much larger refinancing needs.
“The auction metrics look robust on aggregate, although not as spectacular as yesterday’s Spanish supply,” said Michael Leister, a strategist at DZ Bank in Frankfurt.
Italian bonds rallied after domestic banks awash with ECB money snapped up Spain’s bonds on Thursday. The mixed results of the Italian sale tempered market enthusiasm and Italy’s 10-year yields rose back above 6.60 percent in the secondary market, after falling below 6.50 earlier in the session, to their lowest level in more than a month.
“This will serve to dampen some of the markets’ enthusiasm in the wake of yesterday’s Spanish auction … It doesn’t defeat the notion that the ECB extraordinary liquidity provisioning will support peripheral debt but it perhaps tempers expectations as to what degree these operations will support,” said Richard McGuire, a strategist at Rabobank in London.
LOWEST SINCE SEPTEMBER
Italy sold its November 2014 three-year benchmark bond at an average rate of 4.83 percent on Friday, down sharply from a yield of 5.62 yield at an auction just two weeks ago.
In a sign of improving funding conditions, this was the lowest yield at a three-year auction since September last year though fellow debt struggler Spain only had to pay 3.384 percent on three-year bonds on Thursday.
The bid-to-cover ratio fell to around 1.22, versus an already weak 1.36 ratio at the end-December sale, showing anemic demand for the paper. This time, however, Italy sold the top planned amount of its three-year benchmark.
Rome also sold debt due in July 2014 and August 2018.
The ECB’s liquidity boost, evident also at an Italian bill sale on Thursday where one-year yields more than halved, leaves Italy’s Treasury better placed to refinance some 90 billion euros of bonds maturing between February and April.
That is more than Spain aims to issue in medium and long-term maturities in the whole of 2012.
What analysts now describe as a challenging task may have been an impossible one at the end of November, when market fears of a financial collapse pushed Italy’s short-term debt costs towards 8 percent.
Under the leadership of a new technocrat government, Italy has embarked on a bold austerity push aimed at balancing the budget in 2013.
Analysts at Barclays Capital noted in a report that third-quarter budget data showed a decline in current expenditures for the first time ever, when excluding debt servicing costs.
But Prime Minister Mario Monti must now convince markets it can revive Italy’s ailing growth rate by overcoming entrenched resistance to its liberalization program.
Analysts warn that sentiment on the markets remains fragile with worries over a deal with private investors to voluntarily write down half of the value of their Greek debt lingering in the background.
“Looking beyond this one auction, the issuance challenge for Italy remains significant. Market pressures are most apparent in the 10-year sector of the curve which will face supply in two weeks time,” Citi analysts wrote in a research note.
Italy will sell five- and ten-year bonds at the end of January. On this longer maturities demand from foreign investors plays a bigger role but analysts say Italy would be able to shift only part of its funding burden to the short-term ahead of a second three-year liquidity tender at the end of February.
From previous post “9. And that is probably how Italy just managed to borrow at 1.64%”. This post says Italy 3 years at 4.83%. What gives?
The lower rate was on short-term bills, < 6 months to maturity.
that was for 6 months
Warren: “Once the banking system is ‘topped off’ it only buys more national govt bonds to replace maturing issues, or to add to its balance sheet should its capital increase.”
And tighter capital requirements for European banks start this summer, meaning the available B/S space is tightly capped. Clearly at cross-purposes with ECB measures (though I would think they all know this and are talking about it?). It’s frustrating, as some European equities look plenty cheap…but that’s been true of some Japanese companies too, for a loooong time.
Europe should commission Olivia Newton-John to record the Continent’s new theme song: “Let’s Get Pro-Cyclical!” 🙂