Market Analysis

Quick Hit: Italy’s Sovereign Debt Auction Adds Valuable Perspective

Reviewing the results of this morning’s Italian sovereign debt auction might make you wonder why investors fear recently rising rates.

Yesterday, the Italian Treasury sold €5.6 billion in 5-, 7- and 10-year sovereign debt (BTPs) at auction. You might think this sale ill-timed—coming on the heels of Tuesday’s sovereign debt market volatility, which saw rates across Italy’s yield curve jump. We have seen lots of media coverage fearing recently rising yields combined with Italy’s debt load risk the country’s finances, leading them to wonder whether fixed-interest investors would be willing to step into the breach when refinancing was needed. Yet when the dust settled Wednesday, the Italian auctions were oversubscribed. Actually, the 10-year auction had its highest bid-to-cover ratio (1.48 bids per BTP sold) this year, suggesting higher yields attracted demand. Imagine that. The resulting yields (3.00% on the 10-year) are higher than a month ago for sure, but they are a far cry from the 7.56% yield Italy auctioned 10-year debt at in November 2011, near the eurozone sovereign debt crisis’s height. The 5-year debt sold Wednesday partly refinanced a May 2013 issue at a lower rate! (2.32% versus 3.01%). Similarly, a decade ago, Italy was issuing 10-year debt at yields north of 5%. We’d do a comparison for 7-year debt, but Italy didn’t issue that maturity until 2013. Though if you’re curious, the inaugural auction yielded 3.76%—nearly double yesterday’s 2% yield.

Consider the debt fears dominating headlines this week in light of these results: If Italy didn’t default or require a bailout when it was financing itself at higher rates—nearly double in the case of 10-year debt—is there a valid reason to think today’s rates risk imminent default? 



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