Italy’s short-term debt costs halved at auction on Wednesday as a new package of budget austerity and an injection of cheap long-term money from the European Central Bank won Rome some respite in thin year-end markets.
Analysts warned market nerves could easily reignite and pointed to a tougher test on Thursday when Italy will sell up to 8.5 billion euros ($11.1 bln) of longer-term bonds, including three- and ten-year paper.
But the lowest six-month auction yield and strongest bid-to-cover ratio since September added to a sense that some of the tension around the countries now at the center of Europe’s debt problems had eased for a moment.
European stocks rose and the euro edged up in response.
“This is the first piece of good news for Italy’s bond market since the crisis erupted (for Rome) in July,” said Nicholas Spiro of Spiro Sovereign Strategy. “While today’s auction was supposed to be the less challenging of this week’s two sales given the shorter maturity of the debt on offer and the predominantly domestic buyer base, it’s still a success.”
Italy paid an average rate of 3.25 percent to sell 9 billion euros of six-month BOT bills, down from a euro lifetime record of 6.50 percent just a month earlier. It also sold 1.7 billion euros of 24-month, zero-coupon bonds at a yield of 4.85 percent, down from 7.8 percent a month ago.
Since then the ECB has flooded euro zone banks with almost 500 billion euros of longer-term liquidity and the Rome government has overcome internal opposition to a radical pension reform as part of Italy’s third budget package since the summer.
Spain’s six-month debt costs also more than halved to 2.4 percent at an auction on the eve of the ECB’s bumper tender for three-year money on Dec. 21.
“Many things have changed from a month ago,” an Italian bill trader said. “This doesn’t mean we can rule out further problematic auctions. Markets are easily unnerved.”
