Italian Bond Auction: How Do We Judge Its Success?

Italy sold 9 billion euros of six month bills at an average rate of 3.25 percent, down from 6.50 percent a month earlier, and 1.7 billion euros of 2-year, zero coupon bonds at a yield of 4.85 percent, well below the 7.8 percent paid a month ago.

The issue is how much demand there is for longer-term paper, which will be auctioned tomorrow, including 3-year and 10-year paper. Italian 10-year yields are down to 6.85 percent about 15 basis points below yesterday (Tuesday).

Here's where the auction of 3 year vs. 10 year becomes important:

2 to 3 billion euros of 3 year, 1.5 to 2 billion of 10 year, and 1 to 2 billion of 9 year. If the auction for 10-year indicates high yield levels they will likely target more money toward the 3-year and less toward the 10-year.

So much for the carry trade: the amount of money European banks are depositing at the ECB keeps going up: 347 billion Friday, 411 billion Monday, 452 billion today, another record. These deposits earn 0.25 percent, well below the 4-5 percent they could earn by buying sovereign bonds. IN other words, banks borrowed 489 billion euros from the ECB last week, paid 1 percent interest, and are now parking it with the ECB and getting 0.25 percent interest. They are LOSING 0.75 percent on their investment.

Will they show any more interest in buying longer-term Italian debt?

Elsewhere:

1) comScore said online holiday spending was up 15 percent this year, to $35 billion.

2) Investors Intelligence survey of newsletter writers had bulls at 50.5 percent, highest since May.

3) Cavium shares sink 7.6 percent in premarket trading after the chipmaker cut its fourth quarter revenue outlook to $56-$57 million from $60.9-$62.3 million. (See ticker for latest quotes.) Analysts estimated revenue of $61.6 million. CAVM said revenue has been weaker than anticipated across its enterprise and service provider, as well as the broadband and consumer market segments. The chipmaker sees current quarter gross margins to be one percentage point less than its prior outlook due to low sales volume.

4) Medicis Pharmaceutical dropped 4.2 percent in premarket trading after lowering its fourth quarter outlook because of long-term supply deals it’s negotiating for its acne drug Solodyn. (See ticker for latest quotes.) MRX now expects EPS at $0.51-$0.57, down from its earlier expectation of $0.63-$0.69, and revenue of $170-$183 million versus its prior view of $187-$200 million. Analysts estimated EPS of $0.64 and revenue of $189.7 million

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