Italian Sovereign

Italy emerged almost unscathed from a bill auction on Wednesday, held the morning after Standard & Poor’s downgraded its credit rating by one notch. A sale of longer dated debt on Thursday is also unlikely to be badly affected by the announcement, said analysts.

Italy navigated a potentially difficult auction on Thursday by placing its maximum target of €5bn of five year and 10 year bonds. Yields rose more than 40bp compared to the previous sales of the tenors a month ago and hit their highest level since March, but were still lower than expected, according to analysts.

Italy’s six month borrowing costs nearly doubled at a bill auction on Wednesday, as peripheral Eurozone yields remained elevated following the US Federal Reserve’s unveiling of a rough timetable for the unwinding of Quantitative Easing last week.

Italy’s two year borrowing costs more than doubled amid turbulent markets at auction on Tuesday ahead of an even more daunting task on Thursday when it tests international interest with longer dated debt.

Belgian bond yields spiked sharply and short term French and Germany yields jumped at auction on Monday, a trend that is likely to affect other eurozone sovereigns preparing for a busy week of issuance in volatile trading conditions.

This week's funding scorecard focuses on some of Europe's key sovereigns. Next week's scorecard will offer an update on Spanish regions and gencies.

Italy auctioned term debt on Thursday, the day after it sold bills at the highest levels since March. This week’s sell-off boosted demand, allowing Italy to hit its maximum target size for the auction of the longest bond on offer — a 4.75% September 2028.

Italian 12 month borrowing costs rose to their highest level since March on Wednesday, as the prospect of reduced central bank liquidity weighed on investors’ minds. An even tougher task looms on Thursday, when the sovereign sells €3.5bn-€5bn of three year and 15 year debt.

Italian yields rose at an auction of five and 10 year debt on Thursday but the sovereign is still in a comfortable funding position ahead of the summer, said analysts.

Italy issued its longest deal in nearly three years on Tuesday, raising €500m shortly before the European Commission decided to let the sovereign exit a budget restriction programme imposed in 2009.

Italy set a euro-era record at auction for the fourth time in just over a month on Tuesday when it sold zero coupon bonds, as investors reacted warmly to political and macroeconomic news from the country. The strong sentiment may support further auctions later this week, according to analysts.

The EFSF has mandated three banks for a 10 year benchmark deal, which, should it go well, will wrap up a stellar week for borrowers associated with Europe’s sovereign funding crisis. The bail-out vehicle will follow a thumping €7bn sale in 10 years from Spain on Tuesday and what looks to be a successful €6bn 30 year sale from Italy on Wednesday.