March 6, 2021

Italy’s Cost of Borrowing Falls in Latest Bond Sale; Central Bank Action Is Credited

But Rome’s financial position remained precarious, and traders said continued support would be needed from the European Central Bank to keep its financing costs from rising again.

The auction of 10-year bonds was the first since the central bank started buying Italian and Spanish debt in the secondary market three weeks ago, an extraordinary measure that began after both countries’ borrowing costs soared to 6 percent.

On Tuesday, the Italian Treasury sold 3.75 billion euros, or $5.4 billion, of 10-year securities priced to yield 5.22 percent. In a sale of similar bonds in late July, the rate was 5.77 percent

Demand for the securities was 1.27 times the amount offered, down from a level of 1.38 times at the last auction. The Italian Treasury also sold 2.99 billion euros of notes maturing in 2014.

“Italy is still able to fund itself at market rates, but those are being artificially depressed by the E.C.B.’s bond buying,” said Eric Wand, an interest rate strategist at Lloyds Bank Corporate Markets in London.

He said traders had been speculating that the central bank bought Italian bonds in the market after the auction. “If the E.C.B. was not around, the situation would be a lot worse,” Mr. Wand said.

Under European treaties, the European Central Bank is not allowed to buy bonds directly from governments, meaning it can provide support only in the secondary market.

The yield on Italy’s benchmark 10-year bond was stable around the time of the auction at about 5.13 percent. It has dropped more than one percentage point since the European Central Bank started buying Italian and Spanish debt on Aug. 8, and by the close of trade on Tuesday, it had slipped to 5.11 percent.

Italy had 1.6 trillion euros of debt at the end of last year, according to its debt management office, making it the biggest national bond market in Europe.

Seeking to address concerns about the Italian fiscal position, Prime Minister Silvio Berlusconi and other senior officials met Monday to amend a recently drawn-up fiscal package that was intended to achieve 45.5 billion euros in savings. Among the changes discussed were proposals to drop a tax on high earners and to limit financing cuts to regional governments, Bloomberg News reported.

But the Bank of Italy warned Tuesday that the government’s revamped austerity plan must not cut back on its original proposal to increase taxes and cut spending, The Associated Press reported. The central bank said that even with the plan intact, Italy risked economic stagnation.

The lower house of Parliament will start debating the program next week. It is expected to be voted on by mid-October.

Euro zone governments are working to ratify changes aimed at bolstering the region’s primary bailout system, known as the European Financial Stability Mechanism. But analysts said that would take time, and in the interim, countries like Italy and Spain would continue to need central bank support.

Last week, the bank bought 6.65 billion euros in euro zone bonds. Analysts expect it to buy more this week.

Spain is planning a sale of five-year securities on Thursday.

While the Italian bond auction appeared tepid, more evidence emerged Tuesday that the European economy was slowing amid an escalation in the sovereign debt crisis and the recent turmoil in the financial markets.

The European Commission’s economic sentiment index for the euro area fell to 98.3 in August from a revised 103.0 in July. The reading was weaker than the 100.5 that analysts had estimated, and it was the lowest level since February 2010.

The weakening in sentiment in August showed itself across the board, with the confidence of both industry and services falling around four points, while consumer confidence was down more than five points.

“The current level of the economic sentiment indicator, if confirmed in September, probably indicates that the recovery in the euro zone has come to a standstill,” said Peter Vanden Houte, an analyst at ING. “A small negative growth figure in the third quarter seems no longer excluded.”

Bucking the general trend, however, Italian business confidence unexpectedly rose in August as manufacturers became more optimistic about demand for their goods, another report showed.

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