Italian Sovereign

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.

The Kingdom of Sweden sold a $1bn privately placed euro medium term note on Thursday, boosting its already comfortable progress in tackling an extra Skr137bn ($21.1bn) funding requirement.

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.

The Republic of Italy will have to finance an extra €50bn over the next two years, as a government plan to speed up debt payments to private suppliers and falling tax receipts put pressure on its budget. The news comes as the sovereign suffered a drop in its average debt tenor at the end of March.

Demand for the Republic of Italy’s debt was muted at an auction of five to 10 year bonds on Wednesday, as domestic and Eurozone strife drove investors to shun the paper.

The Republic of Italy geared up for the launch of a new five year line later this week with a comfortable bill auction on Tuesday, despite a looming deadline for the formation of a new government, rumours of a downgrade and mounting speculation over a funding target hike.

The Republic of Italy achieved a “solid” result at a debt auction on Monday, despite rising yields and falling demand in the shorter part of the curve, analysts said.

Suggestions that the Republic of Italy could increase its 2013 funding target in order to pay off private creditors have led to a slight softening of investor appetite for the credit, analysts said on Tuesday.

The contrasting fortunes of the two largest peripheral eurozone sovereigns were sharply highlighted on Wednesday morning, as the Republic of Italy struggled to find demand at a debt sale while the Kingdom of Spain looked forward to an unscheduled auction of ultra long securities.

The Republic of Italy paid inflated yields on Tuesday at its first debt auction since being downgraded by Fitch Ratings last week, and could well have to cough up on Wednesday when it attempts to sell longer dated debt, said analysts.

Despite the speed at which the market bounced back from shambolic Italian elections last week, it is not back to full heath.