Italian Sovereign

Italy raised over €7bn of long-dated debt on Thursday, its first attempt at accessing duration funding since a strong rally over the summer. But a sell-off in peripheral bonds darkened the mood and doesn’t bode well for Spain’s auction next week.

Italy is preparing to face its first test of international demand since the summer’s SSA market rally — an auction of 10 year debt on Thursday. The debt sale follows a T-Bills auction where Italy achieved its lowest yields since March.

Spain slashed its borrowing costs in a treasury bills auction on Tuesday, underlining an improvement in sentiment towards periphery credits over the summer. Italy is likely to meet with similar strong demand when it auctions T-Bills later this week, said analysts.

Germany, Italy and France started off a busy week of auctions on Monday with €18.87bn worth of short term debt auctions. Investors maintained the eurozone divide between periphery and core, with yields edging up in Italy and down in Germany, and bankers expect this to trend to continue throughout the summer.

Italy raised €5.479bn of debt through government auctions on Monday morning, including a hefty chunk of 10 year money. The sovereign was able to print at much lower yields than it could have done last week thanks to expectations that Europe’s policymakers will intervene to bring down peripheral sovereign yields.

An Italian auction of two year zero coupon paper on Thursday demonstrated that Italy is not immune from the bondholder fears that surround Spanish debt. However, expectations that the Securities Markets Purchase Programme part II might be on its way brought yields hooning in again.

Spain sold over €7bn of bills on Tuesday between three and seven months in maturity while its 10 year yields moved north of 7.5%. Meanwhile, Moody’s shifted the outlook on Germany’s triple-A rating to negative.

Spanish bond yields circled perilously high on Monday. The 10 year reached highs past 7.5% leading to fears that a new — and more severe — stage in Europe’s sovereign debt crisis has been reached.

Italy auctioned a quartet of bonds on Friday morning, following a two notch downgrade of the sovereign by Moody’s late on Thursday night. However, Italy brushed off the ratings cut, hitting its maximum desired auction amount of €5.25bn.

The Republic of Italy dipped its toe back into commercial paper this week, printing its first trades of the year. It was the country’s first CP since late autumn last year.

Standard & Poor’s placed 15 eurozone sovereigns on CreditWatch with negative implications on Monday. Six of those countries, including Austria, Germany and the Netherlands, are rated triple-A.

The positive tone to the European government bond market this week could be short lived if Europe’s leaders fail to tackle the continent’s fiscal problems at next week’s summit, warned bankers.