THE EUROPEAN CENTRAL BANK may be forced to resuscitate its dormant policy of buying the bonds of its member states, after an auction of Italian short-term debt this morning met with poor demand from investors.
The Italian treasury sold €8 billion of one-year bonds with demand around 1.5 times larger than supply, but with yields soaring to 2.84 per cent – compared to just 1.405 per cent in a similar auction four weeks ago.
Another €3 billion of three-month bills were sold, with investors demanding interest of 1.249 per cent, compared to just 0.492 per cent at last month’s auction.
The auction is bad news, with the government set to issue a new round of 3-year bonds tomorrow, hoping to raise up to €5 billion.
The poor take-up of the auction has seen one member of the ECB’s executive board, French academic Benoit Coeure, suggest that the bank could recommence its programme of hoovering up bonds from its member states in order to maintain demand for bonds, and keep yields low.
Bloomberg quotes Coeure as saying the current conditions being demanded by investors were “not justified”, and coyly noting that while the ECB’s Securities Markets Programme – the vehicle through which it buys government bonds – is inactive, it was still in existence.
The ECB has bought virtually no bonds since mid-February, as the market yields of bonds in member states began to fall, but could now kickstart a new phase of buying the bonds if investors decide not to give their cash to hard-up eurozone countries.
Despite the poor takeup of the short-term bonds, however, the yields on the benchmark 10-year bonds from struggling countries – most notably Italy and Spain – has fallen slightly, with Italy expected to pay 5.51 per cent for 10-year loans and Spain asked for 5.86 per cent.
Greece yesterday raised €1.3 billion in an auction of six-month bills, with yields standing at 4.55 per cent – lower than the 4.8 per cent it paid during a similar experimental auction two months ago.