Italian bond auction faces weak demand, long-term yields surge: who is buying?

⑴ The Italian Ministry of Finance auctioned three batches of government bonds on Thursday, including €3.5 billion of BTP bonds maturing in September 2029, with a gross yield of 3.43% and a bid-to-cover ratio of 1.57. ⑵ The €3.5 billion BTP bonds maturing in September 2033 had a gross yield of 3.98% and a bid-to-cover ratio of 1.52. ⑶ The €750 million ultra-long-end BTP bonds maturing in March 2072 had a gross yield of 4.61% and a bid-to-cover ratio of 1.79. ⑷ Compared with the previous auction, the 2029 BTP yield rose by about 45 basis points, while the 2033 BTP yield rose by about 48 basis points. ⑸ Auction results show that the 3-year BTP yield reached its highest level since June 2024, and the 7-year BTP yield reached its highest level since November 2023. ⑹ Yields at the long and ultra-long end have risen sharply, reflecting the market's repricing of ECB rate hike expectations and Italy's fiscal outlook. While the bid-to-cover ratio is decent, the surge in yields indicates that investors demand higher compensation to take on these bonds. ⑺ Moving forward, attention needs to be paid to whether the yield spread between Italian and German bonds will widen further after the ECB interest rate decision, as well as the market's continued tolerance for the financing costs of highly indebted countries.