Spain, Italy debt sales help ease interbank rates
NEW YORK (Reuters) – Interbank lending costs dipped on Thursday after strong bids in debt auctions in Italy and Spain alleviated some immediate concerns about the sovereign countries’ ability to finance themselves as the European debt crisis rages on.
Spain sold double the targeted amount at its auction of a new three-year bond and two existing bonds maturing in 2016, while yields halved at an Italian T-bill sale, reflecting the success, at least for now, of what amounts to a backdoor bailout by the European Central Bank.
Banks are flush with cash after the ECB injected nearly 500 billion euros of three-year funds into the system in December, and the auctions had been expected to go well after traders supported strong domestic buying of Spanish paper in the secondary market this week.
“Spain and Italy are the two key countries in the battle against the debt crisis, so it was essential that they prove the capital markets are still accessible,” said Gavan Nolan, director of credit research at Markit in New York. “Spain did that quite emphatically, selling nearly 10 billion euros in three, four- and five-year bonds; the target was five billion euros.”
“Italy’s bill auctions this morning were less important, given the short maturities involved,” he said. “Nonetheless, the fact that it sold 12 billion euros at far lower yields than in December was a welcome, if expected, development.”
The ECB on Thursday kept interest rates steady at its monthly rate-setting meeting and offered little insight into whether it would consider cutting the refinancing rate from its current record low 1 percent.
However, ECB President Mario Draghi pointed to signs the central bank’s injection of half a trillion euros into the euro-zone banking system in December had helped to avoid a credit crunch, highlighting the reopening of unsecured bond markets.
Covered bond issuance in Europe has risen in early 2012, with more than a dozen deals lifting optimism the asset class will help banks meet their record 2012 funding needs.
Appetite for European debt will be tested again on Friday, when Italy will auction longerterm debt for the first time this year.
Despite signs of improvement in some areas, Draghi still described the interbank funding market as “not functioning.”
Analysts said the market for unsecured funding, where banks traditionally sourced the majority of their financial needs, remains moribund.
“Some of the unsecured markets are opening up, but I think it’s still pretty locked for all but the best names,” said Eric Wand, a strategist at Lloyds Bank in London. “There’s a slight thawing, but obviously a long way to go before we get banks happy to lend to one another.”
The three-month Euribor rate, fixed daily based on contributions from a panel of banks, showed banks believed they could obtain funding at 1.245%, extending a continuous daily fall that began on December 21.
The equivalent Libor rate also fell, but analysts said that at this stage, there was little real lending available to banks at that duration and cost.
Three-month dollar-denominated Libor dipped for a fifth straight day on Thursday, fixing at 0.5715% after hitting a 16-month high of 0.5825% last week.
Separately, Fitch Ratings on Thursday said US primemoneyfunds continued a flight to quality in the third quarter, reducing exposure to European financial institutions in favor of boosting holdings of US government securities.
As of November 2011, Fitchrated prime-money-market funds held 9.8% of their total assets in US government securities, up from 5.4% invested in Treasuries in May, 2011, the ratings agency said.