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Bonds: Italian and Spanish yields on the up

Date: Monday 14 Nov 2011

Bonds: Italian and Spanish yields on the up

The Italian Treasury met its target after issuing €3bn in five-year debt today, and while demand improved, the yield was significantly higher than the previous sale, setting a new euro-era high in the process.

Thus, the bid-to-cover ratio – a barometer of demand - improved, according to market sources, coming in at 1.47 versus 1.34 the last time around. The debt, however, was priced to yield 6.29%, well above the 5.3% seen at the previous auction.

Mario Monti was named as the new Prime Minister of Italy over the weekend, after a tumultuous week for the country in financial markets, which saw former Prime Minister Silvio Berlusconi practically defenestrated.

Investec analysts Phillip Shaw and Victoria Cadman said “Although the new government is good news for Italy's medium-term sustainability, the more immediate concern is that bond yields continue to decline which will probably take further efforts by the ECB over the course of the week.”

Meanwhile, Christian Clausen, the president of the European Banking Federation, told Bloomberg that European banks should keep selling risky sovereign bonds. “The banks are doing exactly what they should be doing: they are reducing their risk toward this event. We can see that clearly as now Italian bonds are being sold off…They should keep doing what they are doing. The banks are actually moving out of the epicenter.”

The borrowing rate on 10-year Spanish bonds exceeded the 6% level for the first time in over three months on Monday, driving the Spanish-German spread to 428 basis points (bp), a euro-era record.

The yield on a 10-year US Treasury bond fell by 1bp to 2.05%, the 10-year UK gilt yield fell by 8.9bp to 2.2%, while the yield on a 10-year German bund fell by 8.5bp to 1.8%.

BC

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