Article By CNBC via Reuters
Italian government bond yields edged higher on Tuesday and were expected to rise further this week with investors growing nervous that thin liquidity may complicate Rome’s plans to sell 8.5 billion euros worth of debt.
Ten-year Italian bond yields rose 8 basis points on the day to 7.10 percent, widening the spread over German Bunds to 515 bps.
Italy plans to sell three- and 10-year debt in its regular month-end tender on Thursday.
“The 10-year is the area where Italy has to rely more on foreign investors and it will be very tough to sell especially at this point in the year, so I expect further cheapening of the bond going into the auction,” ING rate strategist Alessandro Giansanti said.
“The three-year would be easier to sell, there is some demand from the domestic investors. If they see really weak demand in the 10-year … they may sell more short-term (debt).”
The 7 percent level is roughly the threshold beyond which other euro zone governments have been forced to seek bailouts and markets will get increasingly nervous if yields stay above it for a prolonged period when trading picks up early next year.
Investors fear that Italy, although having different debt dynamics than Ireland, Greece and Portugal, could suffer the same fate, especially as it faces around 100 billion euros in bond redemptions and coupon payments between January and April.
Any early January signs that the banks that took almost half a trillion euros in cheap three-year loans from the European Central Bank last week will use any of the funds to buy high-yielding Italian and Spanish debt may lift sentiment.
However, analysts say the banks are likely to use the money to finance their own debt rather than buy government paper that would leave them at risk of having to mark down losses if the euro zone sell-off continues.
Short-dated bonds issued by the euro zone’s most indebted states had rallied until late last week on prospects of such carry trades, but traders warned the gains were made on the back of short-term investors which immediately booked their profits after the ECB tender.
Bund futures were last 14 ticks higher at 137.69, having traded in a range wider than one full point during the session, with traders saying there was no fundamental factor behind the moves, exacerbated by thin volumes as UK markets were closed.
Ten-year German yields were down 1.6 basis points at 1.94 percent. The bid spread—which is usually an indicator of market liquidity—was around 9 cents, the widest this year.
The 38 percent Fibonacci retracement of the November-December rally at 136.72 was expected to offer strong support for the March Bund future, with December’s high at 138.86 the next target on the upside, technical analysts said.
Two-year Schatz yields hit fresh record lows at 0.163 percent, with safe-haven bids and massive excess liquidity in the euro system driving short-term rates ever lower.
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