Wall Street Journal features Stephen Pope & Spotlight Ideas
Friday July 27th 2012http://online.wsj.com/article/BT-CO-20120727-706753.html
- July 27, 2012, 7:04 a.m. ET
UPDATE: Italian Yields Drop at T-Bill Auction on Draghi
--Italian T-bill yields drop at government auction
--European Central Bank governor's remarks boost appetite for Italian bond
--Longer-term, more needed to lower yields further, analysts say
(Adds analyst comments, context throughout)
By Emese Bartha
Italy's borrowing costs fell sharply at an auction of short-term debt Friday as investors took heart from European Central Bank President Mario Draghi's comments that monetary policy makers would do "whatever it takes to preserve the euro."
The Italian Treasury sold its targeted 8.5 billion euros ($10.4 billion) of six-month Treasury bills at an average yield of 2.454%, down from 2.957% at the previous auction of the same maturity June 27. It received EUR13.720 billion of bids, a coverage ratio of 1.61, compared with 1.62 last month.
Mr. Draghi said Thursday that the high yields investors now demand for some countries' debt "hamper the functioning of the monetary policy transmission channel" and thus addressing these difficulties fell within the ECB's remit.
These remarks suggest the central bank, previously hesitant to drift far from its inflation-fighting mandate, now sees broader scope for action. Investors read Mr. Draghi's remarks as indicating that the central bank may be ready to buy government bonds or embark on other measures to drive sovereign borrowing costs down.
In secondary markets, the comments triggered a sharp fall in government bond yields of financially stressed sovereigns, most significantly those of Spain and Italy, and may help lower the Italian government's borrowing costs to more sustainable levels when it offers Monday EUR5.5 billion of debt maturing in 2015, 2017 and 2022.
But longer term, concerns persist, given the fragile economic outlook and high levels of unemployment in Italy and Spain.
"The euro zone is bust, has no growth, has low confidence and job destruction as against creation," said Stephen Pope, managing partner at Spotlight Ideas, a U.K.-based research company.
"Expectations are high and should the ECB disappoint these, we might see sharp, adverse moves in the peripheral bond market," analysts at Belgium-based KBC Bank said Friday.
London-based fixed income strategists at Rabobank International said the most likely near-term course of action for the ECB was to revive its dormant bond buying program, or deploy the European Financial Stability Facility, the euro zone's temporary rescue fund.
"Neither is likely to provide more long-term support," the Rabobank analysts wrote in a research note Friday.
The ECB's bond purchases to support Spain in August last year "served to compress the country's yields for circa two months before renewed and more powerful contagion effects took hold," the report said.
-Write to Emese Bartha at firstname.lastname@example.org
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