Italy auction calms bond market fears

ITALY yesterday went some way towards soothing concerns over contagion of Greece’s debt woes, successfully completing a key auction of two of its bonds.

The auctions of €6.5bn (£5.64bn) of Italian three-year and ten-year notes were both covered about 1.5 times, signalling strong investor demand for the debt despite the escalating crisis in Greece and recent credit rating downgrades for Portugal and Spain.

“[The] auction result dismisses investors’ fears over contagion effects on Italy,” UniCredit fixed income strategist Chiara Cremonesi said in a note.

“It also confirms our view that the better economic, fiscal and rating outlook for Italy puts it in a favourable positioning among the periphery group. We expect Italy to continue benefiting from this favourable positioning over the next months.”

Italy’s bond auction came ahead of an even more crucial test for the Eurozone bond markets next week, as Spain attempts to get away a €3bn auction of its five-year debt in the wake of Standard & Poor’s downgrading the country’s sovereign credit rating to AA on Wednesday.

Meanwhile, Portugal – which was downgraded to A– status by S&P on Tuesday – yesterday announced plans to buy back some of its expiring bonds on 3 May, in a bold attempt to reassure investors that the country has the cash available to redeem its debt.

Portugal plans to buy back €1bn worth of a €5.63bn bond expiring on 20 May, a move analysts described as “psychologically a good sign”. The country has conducted five auctions so far this year, buying back around €1.76bn in various maturities.