Quick Hit: Italy’s Bond Auction Adds Valuable Perspective

This morning, the Italian Treasury sold €5.6 billion in 5-, 7- and 10-year debt at auction. You might think this sale ill-timed—coming on the heels of yesterday’s bond market volatility, which saw rates across Italy’s yield curve jump. Many believe the rising yields combined with Italy’s debt load risk the country’s finances, leading them to wonder whether bond buyers would be willing to step into the breach when refinancing was needed. Yet when the dust settled this morning, the Italian auctions were oversubscribed. Actually, the 10-year auction had its highest bid-to-cover ratio (1.48 bids per bond sold) this year, suggesting higher yields attracted demand. Imagine that. The resulting yields (3.0% on the 10-year) are higher than a month ago for sure, but they are a far cry from the 7.56% yield Italy auctioned 10-year debt at in November 2011, at the debt crisis’s height. The 5-year debt sold today partly refinanced a May 2013 issue at a lower rate! (2.32% versus 3.01%). Similarly, a decade ago, Italy was issuing 10-year debt at yields north of 5%. We’d do a comparison for 7-year debt while we’re at it, but Italy didn’t issue that until 2013. Though if you’re curious, the inaugural auction yielded 3.76%—nearly double today’s 2% yield.

Consider the debt fears dominating headlines today in light of these results: If Italy didn’t default or require a bailout when it was financing itself at higher rates—nearly double in the case of 10-year debt—is there a valid reason to think today’s rates risk default?