LONDON: The risk premium on Italian bonds hit its lowest since July 2011 yesterday, with the government’s solid funding position and signs the eurozone’s third largest economy is stabilising luring investors.
The yield premium offered by Italian 10-year bonds over benchmark German Bunds fell below 250 basis points for the first time since July 2011 — less than half what it was in the two most intense flare-ups of the euro zone crisis in late 2011 and mid-2012.
The premium over Bunds is the main measure of the extra return investors demand to accept the risk of lending to the Italian government. Barring any unexpected shocks, the Italian/German spread should continue to narrow for the rest of the European summer, in part because of a lack of supply of new bonds on offer for the rest of the year.
It is a similar story in Spain, where the yield gap over Bunds was close to breaking below 280 bps to its tightest level in two years.
Italy has completed about 80 percent of its 2013 borrowing plan, according to Reuters data, allowing it to cancel a planned mid-August bond auction. Barclays estimates debt repayments for the rest of year will surpass debt sales by ¤18bn.
Given their still relatively high yields — 4.2 percent over 10 years against just 1.7 percent for Germany — the reduced supply is likely to be met by sustained demand.
This strong financial position allowed Italy to fend off pressure from heightened political tensions last week, when investors worried that former premier Silvio Berlusconi’s conviction for tax fraud could lead to a government collapse. Reuters
