Monday, July 30, 2012

30/7/2012: Grazie, Sig Draghi?

So Mr Draghi made some serious sounding pronouncements last week. The markets rallied. Over the weekend, more serious sounding soundbites came out of Mr Juncker. The markets... oh... still rallying? And thanks to both, Italy had a 'Successories'-worthy auction today am:

  • Italy 5 year CDS fell 20bps to 478 (lowest since early July) prior to the auction
  • 5 year bond sold at yild 5.29 (against 5.84 in previous) with bid/cover of 1.34 (down on 1.54 achieved in previous auction) and maximum allotment of 2.224bn out of 2.250bn aimed
  • 10 year 2022 5.5% bond sold at 5.96% yield (previous auction 6.19%) and bid/cover ratio of 1.286 (against previous 1.28) with allotment of 2.484bn out of 2.5bn planned.

Grazie Sig Draghi?

Now, wait a sec. Yes, there's an improvement. But on less than €4.7bn of issuance... and Italy needs are:

(Source: Pictet)

And hold on for a second longer:

  • Italy's net debt financing cost was at 4.721% of GDP in 2011 with debt/GDP ratio of 120.11% which implies effective financing rate of 3.931%
  • Of course, a single auction does not lift this up in a linear fashion, but... if Italy had troubles with 3.9%, should we not be concerned with 5.29%?
  • Let's put it differently: Italy's GDP grew in 2010-2011 by 1.804% and 0.431% respectively. Over the same period of time, Italy's government debt net financing costs went from 4.236% of GDP to 4.721% of GDP. This year they are set to rise to over 5.36% of GDP as economy is likely to contract ca 1.9-2.0%.
So maybe (I know, cheeky) cheering the current yields is a bit premature? Eh?

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