Italian Sovereign

The great eurozone periphery yield plummet showed no signs of flagging on Thursday, as Spain auctioned medium to long term debt at levels not seen since 2009. Italy is next up on Friday with a bill auction that analysts expect to be a similar success.

Portugal was set to pick up 10 year paper on Tuesday in its first new syndication since it received a bail-out in 2011. Heavy demand enabled the sovereign to set the size at its maximum target.

Italy scored its lowest cost of medium to long term funding since October 2010 at an auction on Monday, as the country’s political deadlock finally looked set to break following new prime minister Enrico Letta’s appointment of a cabinet over the weekend.

Italy broke records for the second time this week as it printed six month bills at the lowest yield since the introduction of the euro, with investor fears over the country’s political direction assuaged by the nomination of a new prime minister.

Italy rode on much-needed momentum in its political scene and expectations of an official interest rate cut to auction two year zero coupon debt at an all time low on Wednesday. The sovereign can look forward to a sale of longer dated debt early next week with even greater optimism, after the nomination of a new prime minister shortly after the auction.

A raft of positive news for the eurozone periphery helped Spain auction short term debt at record low yields on Tuesday and set Italy up nicely for debt sales later in the week.

Italy is toying with introducing a cap on its future Italian inflation linked bonds, after the sovereign sold a €17bn deal this week.

Italy has attracted more than €17bn of orders to a new four year inflation linked bond in two days — just half the time in which the issuer took to raise €18.017bn of a similar instrument in October.

Italy and Spain broke issuance records early this week, providing a solid start to a busy period of peripheral eurozone issuance despite a backdrop of worsening growth forecasts and the possibility of higher borrowing needs.

Italy slashed around 20bp from its funding costs across the curve at auction on Thursday, despite an increase in the government’s debt forecast for the next two years and talk of divisions in the country’s largest parliamentary grouping — which is still struggling to form a new executive.

The Republic of Italy provided some stability ahead of a bond sale later this week with a comfortable bill placement on Wednesday, just one day after the Republic of Slovenia failed to hit its target at an auction of short dated debt.

It’s pretty astonishing that Italy is not only still rudderless politically but facing another €50bn odd to raise over the next two years and yet markets don’t appear to have noticed. But it would be unwise for any issuer to allow itself to become too comfortable with investors’ seeming ability to blithely ignore the bleeding obvious. If Italy were to show that it has a game plan to accommodate the €50bn, it would help insulate itself from any further shocks to the market.