In what could be seen as a "pure measure" of investor sentiment vis-a-vis its economy, Italy will be the only country in the European Union to issue new bonds this week.
Bond sales in Europe have significantly slowed during the August summer break. With question marks hanging over at least half a dozen European economies, the September restart of full-scale bond sales all across the eurozone could be decisive for the future of the euro as a currency. But in the meantime, only Italy will test the waters of debt markets in end-August.
Italy plans to offer a small issue of zero-coupon notes and inflation-linked bonds on Tuesday, followed on Wednesday by six-month treasury bills, and then a round of treasury notes on Thursday. Italy normally issues new debt at the end of each month, but the summer break has created the unusual circumstance in which it is the only European government proceeding with a significant issue this week.
"In many ways, this will be pure measure of interest in Italian debt issues because there will be no alternatives elsewhere for investors," said Hildebrandt and Ferrar chief economist Javier Noriega.
"The outcome of the auctions will be an important test for Italy, given the recent turbulence in cross-country spreads," said Annalisa Piazza, an economist with Newedge brokerage.
In bond parlance, the "spread" is the difference in the yield for bond sales in two countries. For Italy, the spread with the yields from a much healthier German economy reduced by 130 basis points -- that is 1.3 percentage points -- since its widest level in late July.
But it also widened by 25 basis points between trading sessions on Thursday and Friday of last week. Most of the volatility is at the Italian end, showing that investors are not sure what to make of the mixed signals from Italy's start-again-stop-again economic recovery.
Italy "is proving to be a confusing case for the markets," Noriega said.
Economic growth and consumer sentiment in Italy are expected to remain weak, but the risk that Italy may be forced to default on debt payments has diminished significantly even though the country's debt, as stated as a percentage of its gross domestic product, remains stubbornly high at around 120 percent.
But that is because the economy is contracting and offsetting welcome increases in tax revenue as the result of policies from the technocrat government of Mario Monti. He has focused on shutting tax loopholes and fighting against tax evasion. After a flurry of downgrades of Italian public and corporate bonds earlier in the summer, things have been quiet on that front lately.
On secondary markets, the yield on Italy's benchmark ten-year bonds has mostly fallen since reaching a high of 6.61 percent in late July. Aside from one brief spike earlier this month, the yield has steadily fallen, opening trading Monday at 5.70 percent, its lowest level since late May.
If demand for Italy's debt sales this week is high without yields rising, that will be a good indicator that investors are starting to consider Italy less risky. If that happens, it will be a positive development as the level of activity on European debt markets gets set to rise dramatically in September.
