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Italian Yields Spike Following Weak 5 Year Bond Auction, ECB Intervenes Again
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Italian Yields Spike Following Weak 5 Year Bond Auction, ECB Intervenes Again

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Italian Yields Spike Following Weak 5 Year Bond Auction, ECB Intervenes Again

Unlike in the past week, when the ECB had a clear agenda of getting Berlusconi out, and thus let 10 Year BTPs tumble to a record low price of 82 cents before even pretending to intervene, all it took today was a modest drop from 88.80 to 87.80 before Mario Draghi sent his bond traders out in the market lifting every offer. As for the sell off catalyst: the auctioning off of €3 billion in 5 year bonds which cleared at a record 6.29%, the highest pricing yield since 1997. This compares to the last auction of 5.32% on October 13 and a bid to cover at the current auction of 1.47 compared to 1.34 last. Yet once again, mysteriously like last week's 1 year auction, the bonds came in well inside of the prevailing yield just before the auction which was 6.43%. Once again one wonders: precisely how do these auctions continue to clear with no tail whatsoever, and why would anyone buy the bonds in the primary market at a price that is much higher than the secondary one. But we can wonder: in the meantime the EFSF will assure us it is not a ponzi scheme. Either way, just as the 10 Year BTP price threatened to take out early support following a very aggressive selloff beginning just as the 3 Year came to market, the ECB stepped in and started buying bonds up. No wonder the EURUSD is well below the Friday closing price, and trading at 1.3670 at last check. For those interested, below are the kneejerk Wall Street analyst responses to the Italian auction.

Italian intraday BTP price:

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From Reuters.

DAVID SCHNAUTZ, STRATEGIST, COMMERZBANK, LONDON

"Given the tiny amounts, the bare minimum Italy is selling these days to get the upper end of that tiny range is encouraging. (Yields) are still clearly eye-watering...This can only be done for quite a limited time-span."

"Looking at what Bunds and Treasuries did since opening we have clear renewed flight to quality to some extent...You have a better political situation in Italy but at the end of the day it's still a tiny amount. Its hard to say this is a vote of confidence by the bond market."

ANNALISA PIAZZA, RATE STRATEGIST, NEWEDGE, LONDON

"The relative small amount on tap for a mid-month BTP auction, coupled with record high levels for Italian five-year yields, have supported the decent demand at today's auction. Bid/cover was not spectacular though, despite the cheapness of the paper.

"Dealers remain cautious on the developments in Italy. The new appointed PM (Mario Monti) is perceived to be a positive change for the country...Cautiousness on the future developments in Italy is fully justified. Credibility has been lost and it will take a while for market participants to believe that the country is back on the right track."

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

"It's been sold about 13 basis points below the market level, which is reasonably encouraging. The cover is OK, it's not fantastic. There was always going to be good domestic support particularly with it being a five-year maturity. There is a lot of natural demand from the banking sector for balance sheet purposes."

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE CIB, LONDON

"It's a decent bond auction. They sold the full amount and it came well through the secondary market and low yield level of this morning, so there's been decent paying up to pick this bond up.

"The micro-view is supportive but there's no getting away from the long-term view that this is a significant rise in yields for an Italian five-year auction."

MARKET REACTION:

- Bund future up 44 ticks at 137.70 vs 137.91 before auction

- Italian/German Bund 10-year spread 463 bps vs 460 bps before auction

Italian BTP future up 0.52 at 94.18 vs 94.03 before auction.



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