Italian issue ripe for EUR short?

Italy issued up to €8b worth of bonds this morning with maturities ranging between 2014 and 2020. The major concern to the market has always been any evidence of further weakening in investor demand for “peripheral” sovereign paper. The Italian issue is competing this week with sales of securities in Belgium, France and Spain of as much as 10b EUR’s. The amount of the Italian auction is very “modest, but a challenging one in this economic climate.” The placement could have easily been canceled or postponed as the Italian Treasury and Prime Minister Monti could do without the headache, but, that would have been a very bad signal to the markets and we all know confidence is about perception. Capital markets smell blood and fear very quickly.

The results of the auction seem to be have been spun both ways this morning. Overall, the auction was taken down, with minimal of fuss. The EUR3.5b 11/14’s have been sold out of EUR5.26b total bids, producing a favorable cover of 1.5 (the best cover in seven-months). The 3/20’s received EUR3.3b total bids, of which EUR2.5b were filled, producing a cover of 1.34 just below the average. Finally, 9/20’s received EUR2.3b total bids, of which EUR1.5b were filled, to produce a cover of 1.54.

The EUR popped to a session high on the results, at the same time running stop-losses as macro names are quick to point out that the +7.56% new Euro era lifetime high-yield for a 10-year auction is certainly not good news. With the market focusing on the depth of demand, it has spurred the EUR higher short term, but the underlying tension remain and this could see deeper pocket investors queuing again to sell the single currency ahead of key resistance points.

Businesses and consumers who share the EUR have become more pessimistic about their prospects this month as more governments are forced to pay up for borrowing as highlighted by ballooning yields. The EC monthly survey of sentiment found that manufactures were experiencing a drop in exports, while service providers and retailers expect a slowdown in future activity and consumers become more discouraged about their economy and the job market.

The Eurogroup finance ministers meet today. The meetings are expected to focus on the disbursement of Greece’s next loan tranche rather than on the more significant issues now weighing on market sentiment. Capital markets are not holding their breath for anything of a eureka nature from participants. It seems that the December 9 summit is the next key event on the near-term policy calendar.

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Euro optimism sinks US bonds

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