Wednesday, September 14, 2011

Italian Bond Auction

Italy has been busy with bond auctions this week and managed to get out E6.5bn in bond issuance yesterday. Equity markets rallied and many investors breathed a sigh of relief from the ongoing European Sovereign Debt Crisis.

However, lets puts this into context.

According to the FT, the ECB has bought over E143bn in bonds as part of their bond buying program. Half of this has happened in the last five weeks.  With a back-of-envelope calculation, it is not unreasonable to assume that the ECB has bought around E30bn of Italian bonds over the last month.

Therefore, the Italian auction is hardly a cause for celebration. In a previous post, the key banking stress indicators were outlined and, before being optimistic for equities these indicators must turn positive. Otherwise, there is no point in the ECB actions. Readers can find these banking stress indicators here

Furthermore, looking at how the bond markets reacted after the auction, it is clear that the bond markets were not impressed and are showing increasing signs of stress...

In fact, the bond auction saw Italy borrowing (despite ECB manipulation) at highs after the initial ECB intervention...

One-Year Chart for Italy Govt Bonds 10 Year Gross Yield (GBTPGR10:IND)

...Italian CDS are through the roof...

One-Year Chart for Republic of Italy (CITLY1U5:IND)

and the Italian-German yield spread is at an all time high...

One-Year Chart for ITALY 10 - GERMANY 10 SPREAD (.ITAGER10:IND)

It doesn't look good.

As for the speculation over China buying Italian bonds; the timing of the press speculation smacks of  a desperate attempt at 'supporting' the Italian auction. The subsequent confirmation by Italian officials on the day of the auction was wonderfully prescient. Has it really come to this? Italy now has to 'ramp' its bond auctions via the press?

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