An auction of $11.2 billion in Italian bonds went off without a hitch this morning, with yields on 10-year government bonds remaining at a respectable 5.22%.
The auction was under heavy scrutiny from investors as it was widely regarded to be a test of the European Central Bank’s bond-buying firepower.
Nonetheless European markets turned negative around the time of the auction.
Yields on 10-year Italian government bonds fell from a record 6.40% earlier this month after the ECB started buying up Italian and Spanish government bonds. Bond yields have remained generally under control since then.
The ECB is not permitted to purchase bonds directly from governments, so this morning’s auction proved that ECB secondary market intervention was still having a strong impact on bond prices. Reuters reports that the ECB was seen purchasing a significant quantity of Italian bonds nearing maturity.
Shahid Ikram — head of sovereigns at Aviva Investors — told Bloomberg, “This is where the litmus test comes, the test to see whether the ECB’s buying power can hold yields where they are.”
Despite the success of the sale, the FTSE MIB had fallen more than 1% by 6:15 AM ET, with Italian 10-year bonds to bunds spreads rising to 298bps.