Italian government bond yields fell today after a sovereign debt auction drew strong demand, indicating Rome may be fairly insulated from tensions in emerging markets.
Large reinvestment flows from maturing debt and coupon payments this week were one of the factors feeding demand, helping Italy raise €8.46 billion at the auction, near the top of its planned range.
Its benchmark 10-year borrowing costs fell to 3.81 percent from 4.11 percent at a similar auction a month ago, matching a level last seen in August 2010. The five-year bond, a new issue, sold at a record low of 2.43 per cent, well below the 2.71 per cent yield at the last sale of five-year paper in late December.
This helped push Italian 10-year yields 2 basis points lower to 3.84 per cent, outperforming most lower-rated euro zone bonds. The strong bidding for the auction came while emerging market assets were enduring a sell-off that has dampened global risk appetite, suggesting that Italy may be reasonably insulated from the turmoil in the developing world.
“We had a very good auction this morning and we have large repayments ... so there’s abundant liquidity in the market,” said UniCredit rate strategist Luca Cazzulani. “Also, you could expect some effect from emerging markets on Italy but only to a limited extent.”
Italy and other parts of the euro zone could even benefit from the emerging markets’ woes, some analysts said.
RBS strategist Harvinder Sian said some of the cash flowing out of emerging markets could find a home in Italian, Spanish and Irish bonds, as sentiment in those markets has been bolstered by the European Central Bank’s accommodative policy and the euro zone’s improved growth outlook.
“The weakness in emerging markets actually favours, on a medium-term flow basis, the euro zone periphery,” Mr Sian said. “The developed markets went into crisis in 2008/09 and investors looked across and found emerging markets more attractive ... That flow is now beginning to reverse back to the periphery.”
Analysts say the improving euro zone growth prospects, the relatively attractive yields and the sheer size of the Italian debt market are among the factors that should protect the country from major external shocks.
Also, the prospect of a stronger euro currency as a result of repatriation of flows from emerging markets was bolstering speculation about further European Central Bank easing. The five-year bond in particular attracted healthy demand.
Traders said domestic investors were major bidders, looking to reap higher returns by extending the average life of their portfolios as ultra-easy monetary policy in the euro zone keeps a lid on short-term rates.
At the euro zone's core, German 10-year debt yields were down 2.4 bps at their lowest levels in nearly six months around 1.62 per cent. Bund futures rose 33 ticks to 143.23 with traders saying month-end related buying added to the gains. Reuters
