ECB fails to lift demand for Italian debt auction

ITALY finally returned to debt markets yesterday with a sale that saw weak demand despite European Central Bank (ECB) efforts to keep yields down.

Rome sold €7.75bn (£6.86bn) of long-term debt, but the bid-to-cover ratio on a new ten-year bond slumped to 1.27, below the 1.4 average for this year.

There was speculation that the ECB intervened in the secondary market to prop up prices during the sale.

Italy paid 5.22 per cent to sell its ten-year bonds, down from 5.77 per cent at the last similar auction in July before the ECB restarted its bond-buying programme.

Figures published yesterday showed the Bank has mopped up a staggering €43bn’s worth bonds in less than a fortnight, bringing the total value of its interventions so far to €115.5bn.

Although the Italian and Spanish bonds the ECB is buying are less risky than the Greek, Portuguese and Irish debt it has bought previously, the sheer size of Rome’s bond market means that its interventions must be far larger to have an impact.

As a result, Italian and Spanish ten-year yields have fallen from over the “danger threshold” of six per cent closer to five per cent, but it is not clear how long the Bank can sustain the purchases.

Meanwhile, Eurozone leaders remain locked in dispute over whether the region’s bailout fund should be allowed to inject new capital into failing banks.