Wednesday, August 31, 2011

Did the ECB back bidders for the Italian 10 year bond?

My headline poses a worrying question, but see this quote below from the "Action Man" site, linked here:

The launch of a new 10-year benchmark bond drew bids worth 1.27 times the 3.75 billion euros sold, below the year's average bid-cover ratio of 1.4.
The new 10-year bond sold at a yield of 5.22 percent, broadly in line with grey market prices ahead of the sale. That yield compared to 5.77 percent at an auction of the previous 10-year bond in July, before the ECB's intervention.
The auction will do little to allieviate the market's central fear that Italy, seen as too big to be bailed out, will no longer be able to issue bonds at an affordable level to finance its huge 1.9 trillion euro debt burden.
Italy must still sell up to 90 billion euros in bonds this year and ECB purchases have been steadily decreasing.
(emphasis added)
A bid-to-cover ratio of 1.4 isn't much to write home about either, but 1.27 is only a small step away from a failed auction. It is noteworthy that the ECB saw fit to intervene immediately after the auction, which to us is a sign that certain bidders were enticed beforehand to participate by letting them know that they would be backstopped shortly thereafter. Of course we can't prove that, but we don't believe in coincidences, not when things look as blatant as they do here.

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