Trader Talk

Inside the Italian Bond Auction

The Italian bond auction: they got it done, but yields are still too high and demand was tepid.

The good news: Italy sold the full allotment (2.5 billion euros) of 10-year bonds, and the yield of 6.98 percent was lower than the 7.56 percent yield they paid on similar bonds a month ago. However, demand was fairly weak, and there was also an auction of 9-year bonds (technically, this is the old (2011) 10-year), and here the treasury sold only 1.18 billion euros at a 6.7 percent yield, well below the targeted allotment of 2 billion euros.

More good news: short-term funding costs have dropped dramatically. An auction of three-year bonds was sold at 5.62 percent, well below the 7.89 percent at the last three-year auction in November. Italy's yield curve, which was inverted a short while ago, has reverted to a normal curve.

The bad news: 6.98 percent for 10-year bonds is still way too expensive. Italy has about 90 billion euros of debt in needs to refinance, just in the first four months of 2012.

Bottom line: short-term funding costs have dropped dramatically, likely due to the ECB's new 3-year loan program. But longer-term costs are way too high, banks are parking large amounts of cash with the ECB and seem unwilling to buy large amounts of long-term sovereign debt.

What's the solution? The ECBoffering 10-year loans at...1 percent. Hmm. Mr. Draghi obviously does not want to do that. But he is being boxed into a corner. On the one hand, he is the lender of last resort for the banking system, and on the other hand treaty restrictions (and Wolfgang Schauble) prevent him from buying sovereign debt on the open market and bailing out governments.

There are reports the ECB stepped in after the auction and is buying Italian bonds.

The euro is at the lows for the year against the dollar. European stocks are little changed.


1) Gold in bear market territory: down more than 20 percent from their September record high of $1923.

2) AMR Corp falls on light volume in premarket trading after the bankrupt airline closed at $0.54 a share yesterday, putting its 30-day average pricebelow $1.00 - a level that could instigate a delisting from the NYSE. For continued listing, the NYSE requires a minimum average share price of $1.00 over a 30-day trading period. Will AMR get delisted? This is up to the NYSE, who says they continue to monitor the stock and have nothing new to report this morning.

Once a stock’s 30-day average price falls below $1.00, the NYSE can send the company a notification giving it the chance to raise its share price back above $1.00 over the next six months. Such a notification would require an “intent to cure this deficiency” from AMR within 10 business days. Share price aside, it’s also important to remember that the NYSE can delist at any time when a company is bankrupt.

3) Mosiac slides 4.3 percent in premarket trade after the fertilizer producerannounced yesterdayit would cut phosphate production by 250,000 tons over the next three months because prices have fallen to unsustainable levels. MOS blamed economic uncertainty for the drop in prices, though it reiterated it still expects record global demand for fertilizer in 2012.

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