Spain raised twice as much money as it planned from its first bond sale of the year, and Italy saw strong demand for a sale of 12-month Treasury bills, as domestic banks appeared to use money recently borrowed from the European Central Bank to buy debt.
The surprisingly strong showing pushed down bond yields from both countries and could bode well for a sale of longer-term Italian debt on Friday.
The auctions, the first by two of Europe's financially stressed governments, were seen as a test of investor sentiment as as the worsening growth outlook threatens to deepen the region's debt crisis.
The sales are considered a mood setter for debt offerings in the euro zone in general, and in particular from Italy and Spain, the 17-nation bloc's third and fourth-largest largest economies. Spain's new government earlier this month said its 2011 budget deficit will be much bigger than expected, while in Italy, the government must deliver on promises of structural reforms aimed at boosting economic growth that has been the slowest in the euro zone since the common currency was launched. Its public debt runs around 120% of gross domestic product, one of the highest levels in the developed world.
To be sure, January is considered an exceptional month because the large number of maturing bonds provide investors with cash to reinvest. That won't be as pronounced in the coming months. Italy, for one, must issue about €440 billion in bonds and Treasury billls this year.
One big help so far has been the European Central Bank, which in late December lent euro-zone banks nearly a half-trillion euros for three years. Banks initially parked much of that money at the ECB's overnight deposit window, but a drop in the total, announced Thursday, suggests they are investing the funds, particularly in shorter-dated debt, analysts say.
The ECB plans to offer three-year cash again in February and has said it expects demand to be substantial.
The central bank has also stepped into the market for already issued bonds, in particular buying Italian debt whenever its 10-year yields topped 7%. Economists have warned that borrowing costs above that level are unsustainable over the longer term. Indeed, Greece, Ireland and Portugal, three small euro-zone countries, all accepted bailouts when their costs shot above 7%.
Thursday, yields on the 10-year Italian bond plunged 0.33 percentage point to 6.65%, while the corresponding Spanish bond yield declined 0.10 percentage point to 5.19%, according to Tradeweb data.
Spain raised nearly €10 billion ($12.71 billion) after offering €4 billion to €5 billion in bonds maturing in 2015 and 2016. Bids totaled €18.7 billion, prompting it to double the issue size. Even so, the average yield on the three-year bond, which got most of the extra cash, was 3.384%, well below the yield of 3.506% for the same paper in the secondary market at the close of bidding.
"The result is all the more impressive given that sentiment toward Spain may be cooling somewhat given the much higher fiscal deficit for 2011," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.
Italy sold the targeted €12 billion in a mix of Treasury bills with maturities of 12 months or less. The average yield on the 12-month bills more than halved to 2.735% from an auction a month ago, when the average yield was 5.952%.
Friday, Italy will auction €2 billion to €3 billion in the November 2014-dated benchmark bond, and a further €1 billion to €1.75 billion in the July 2014 and August 2018-dated bonds.
Outside the euro zone, Hungary's funding costs eased slightly at a bond auction Thursday compared with its previous sale two weeks ago. Investors are worried about Hungary, which is seeking a precautionary aid package from the International Monetary Fund and the European Union because of its poor finances.. The government's new law governing the central bank, which market analysts see as a threat to policy makers' independence, has led to unprecedented tension with the IMF and EU.
Equally importantly, the government sold a more-than-planned 44 billion Hungarian forints ($179.8 million) in 2014, 2017 and 2022-dated bonds, in sharp contrast to its previous auction two weeks ago, when it sold less than half of the planned amount.
It paid an average yield of 9.41% on the 2014 bond, after rejecting all bids two weeks ago. It also paid an average yield of 9.41% on the 2017 bond, down from 9.63% two weeks ago, and an average yield of 9.38% on the 2022 bond, down from 9.70% previously.
read more: Olympus Wealth Management
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