Greece’s uncertain future as a euro member pushed Italian and Spanish borrowing costs higher at debt sales on Monday, while investors seeking refuge in higher-rated government paper further drove German six-month yields towards zero at auction.
The two largest countries most vulnerable to a worsening of the euro zone debt crisis tapped the markets as investors globally dumped riskier assets, unnerved by the prospect of fresh elections in Greece that would probably hand first place to a leftist anti-bailout party.
Both Italy and Spain, which JPMorgan said could find themselves cut off from market access if Greece were to leave the euro, also saw a sharp rise in the risk premium their 10-year bonds pay over German Bund ahead of the auctions.
Italy’s yield gap with Germany topped 450 basis points on Monday, easing slightly after the sale as Rome raised the top planned amount of 5.25 billion euros in bonds and paid cheaper yields to sell its three-year benchmark compared with what was available on financial markets.
Spain’s spread against Germany hit a new euro lifetime high of around 490 basis points after Madrid failed to persuade investors with a new plan presented on Friday to clean up its banks over soured property loans.
Spain raised 2.9 billion euros in 12- and 18-month paper, just under the top of the targeted range.
“The (Italian) Treasury can take some comfort from the fact that the (three-year) yield … came in a tad under secondary market levels,” said Nicholas Spiro at Spiro Sovereign Strategy.
“This was a challenging auction given the rapidly deteriorating external backdrop, so the result is, relatively speaking, not bad at all. However, the degree of differentiation between Italy and Spain is becoming less pronounced as the Greek crisis escalates.”
A deeper economic recession, banking troubles, high private debt and a larger budget adjustment required put Spain on a weaker footing than Italy.
However, pressing refinancing needs stemming from the world’s fourth-largest public debt pile make Italy vulnerable to worsening funding conditions for the euro zone’s periphery. The Bank of Italy said on Monday the country’s debt hit a new record in March at 1,946 billion euros ($2.5 trillion).
Italy has completed 44 percent of an estimated annual bond issuance target of around 215 billion euros. Madrid is just shy of 54 percent of its yearly plan ahead of an auction on Thursday of 2015 and 2016 bonds for up to 2.5 billion euros.
A drought of medium and long-term redemption, or repayments to holders, in May and June heightens Rome’s funding challenge, as it leaves Italian investors without flows to reinvest in domestic bonds.
Italy paid 3.91 percent to sell three-year paper, with a fractional increase from a mid-April sale enough to push the yield to a new high since January.
Solid demand helped the Treasury sell the top amount of 3.5 billion euros at a higher price than the one prevailing on the secondary market – where the bond had seen its yield jump by more than a third of a percentage point from Friday.
“Given the overall backdrop, I think they’ll be happy with it but the overall trend is of higher rather than lower yields,” said Alan McQuaid, at Bloxham Stockbrokers in Dublin.
Italy also sold three longer-dated lines it no longer issues on a regular basis.
Spain’s 12-month borrowing costs rose to 2.99 percent from 2.62 percent last month, while it paid 3.3 percent on its 18-month paper, up from 3.1 percent last month.
By comparison, on Friday Italy paid 2.34 percent to sell one-year bills at a well-bid 10-billion euro short-term sale, with an half percentage point drop from a mid-April auction.
On Monday, a radical Greek left-wing party refused to join a final round of coalition talks following fruitless negotiations at the weekend.
With polls showing the anti-bailout leftist SYRIZA party would come first in a new vote investors accepted negative real yields to park their money into German debt. Six-month auction yields for Berlin declined on Monday to 0.04 percent from 0.07 percent at a 3.3 billion euro sale.