Italian bonds 'encouragingly' steady as debt auction flies

Italian government bond yields held steady as the country successfully sold 8.5 billion euros of debt in an auction amid hefty ECB stimulus and hopes the country's efforts to contain the spread of the novel coronavirus may be starting to work. Italy's Treasury comfortably sold the top planned volume of 8.5 billion euros ($9.4 billion) over four bonds on Tuesday, with demand totalling almost 1.5 times the amount placed.

Even though the yields at which the bonds were sold were the highest in eight months, the overall result was strong, analysts said, particularly as the Italian bond market remained relatively unmoved by the new supply. "In the midst of a full-blown crisis, this is very encouraging; almost as if it's business as usual. It is a testament to the success the ECB has had in calming peripheral markets with its beefed-up QE programme," said Rabobank strategist Richard McGuire.

He was referring to the European Central Bank's announcement that it would buy 750 billion euros of debt this year under a new Pandemic Emergency Purchase Programme. In addition, the latest numbers from Italy show a decreasing number of new infections, suggesting the country's strict lockdown and social distancing measures are finally working.

McGuire was a bit more cautious on this data, saying it was premature to say that Italy is out of the woods. But the ECB stimulus has certainly played a part in calming investor nerves over the past week. Although Italian 10-year yields rose 15 basis points on Monday, they were only a few basis points higher after the auction. Bonds tend to sell off sharply during a major sale as investors sell outstanding debt to buy the new supply.

Italy's benchmark 10-year yield was up six basis points in late trade at 1.54%, but still nearly half what they were on March 18, when panic over the impact of the disease on Italy's debt metrics was at its peak. Italy has not only been the epicentre of the coronavirus crisis in Europe, but its ratio of debt to gross domestic product is among the highest in the euro zone and likely to go much higher as it grapples with the economic fallout.

The country's credit rating is only a couple of notches away from junk, potentially taking it out of investment-grade indexes, an additional source of concern. High-grade 10-year bond yields, such as Germany's, rose five to six basis points across the board on improved risk sentiment.

Elsewhere, Belgium was due to sell 8 billion euros of seven-year debt via a syndicate of banks, according to a lead manager update seen by Reuters. Portugal also hired banks for a seven-year sale after it announced an acceleration of its debt issuance for this year.

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