Italian Sovereign

Rising money market rates helped push up Spain’s six month and 12 month borrowing costs at auction on Tuesday, with Italy likely to suffer a similar fate when it sells one year debt on Wednesday.

Peripheral sovereigns should not fear if domestic holders of its debt head elsewhere — as Generali said it would do in an investor presentation this week. Overreliance on its domestic investor base isn’t healthy and, now that the sovereign’s yields are tipping 4%, it can afford for its yields to go up a smidge in return for a more diverse investor base.

Italy sold 10 year debt at a shade over 4% on Thursday, the lowest level since April and in line with its levels before it was dragged into the heat of the eurozone debt crisis three years ago.

Italy’s short term yields could fall to near historic lows at an auction of zero coupon bonds on Tuesday, according to analysts.

The end of November finds almost every sovereign in the scorecard more than 90% funded for the year. Italy's cause was helped in no small part by a bumper €22.3bn domestic inflation linked bond at the start of the month. The UK - with a funding year running from April March - is also well on track with 70% of its programme completed.

Italy ratcheted down its funding costs at a series of auctions midweek, as a series of factors conflated to boost demand for its paper.

International demand should help Italy place its maximum target of €10.5bn of debt this week, said analysts. It has also been tipped to set a euro-era yield low when it auctions €6.5bn of 12 month paper on Tuesday.

Italy and Spain were two of the biggest beneficiaries after the European Central Bank cut interest rates on Thursday. The sovereigns’ yields fell in secondaries — strongly positioning them to close out their funding for the rest of the year — and providing a further fillip at the end of a strong week of issuance.

Italy’s medium to long term borrowing costs dropped to 2010 levels at auction on Wednesday, as the country passed the 90% mark on its annual funding schedule. It could take another large bite of out of its target next week when it launches the latest bond in its domestic inflation linked series.

Italy should find little problem shifting €6bn of bonds at auction on Wednesday but its ever shifting political landscape means the country will underperform Spain in the near term, according to analysts.

The sovereign funding scorecard expands beyond Europe this month with the addition of Japan. The country has a whopping ¥156.8tr (€1.2tr) target this year but is well on track having raised ¥136.2tr so far.

Italy has fine tuned a control to limit the size of its next domestic inflation linked bond — scheduled for early next month — after raising more than €35bn through the last two issues of the instrument.