Policy action hopes drive Italy yields lower at auction
MILAN (Reuters) - Italy's 10-year funding costs fell below 6 percent for the first time since April at an auction on Monday as expectations that the European Central Bank may ride to the rescue of vulnerable euro zone members spurred demand for their debt.
Cautious investors, however, still kept Italy's cost of borrowing at levels which exact an heavy toll on the country's public finances as uncertainty remains on the timing and nature of any further action ahead of an ECB meeting on Thursday.
Italy sold 5.48 billion euros in bonds, near the top of its planned issue range. Benchmark 10-year borrowing costs fell to 5.96 percent from 6.19 percent at a similar auction a month ago.
By comparison, higher-rated Belgium saw 10-year bond yields fall to 2.62 percent at auction on Monday.
"On balance, not an unreasonable set of results," Richard McGuire, a rate strategist at Rabobank in London, said in reference to the Italian auction.
"Despite the welcome dip in yields, though, Italy's cost of borrowing remains decidedly elevated. ... Overall, then, while these sales do provide some indication of an easing of tensions at the periphery, they also show considerable further progress on this front is needed."
Italy's five-year bond yields fell to 5.29 percent at Monday's auction from 5.84 percent a month ago. The Treasury also sold 750 million euros of a three-year bond no longer issued on a regular basis.
Both five- and 10-year auction yields hit their lowest since April but remain elevated, contributing to debt servicing costs which analysts see running close to the 84 billion euros penciled in by the government for 2012.
"Rising borrowing costs are one of the major threats for the Italian fiscal consolidation at the current juncture," said Annalisa Piazza, a market economist at Newedge Strategy.
Spanish and Italian yields retreated from peaks hit early last week after ECB President Mario Draghi said on Thursday that he would do whatever was necessary to defend the single currency, including tackling high government debt costs.
Similar expressions of commitment to the euro by the leaders of Germany, France and Italy have reinforced expectations for steps to support Italian and Spanish bond markets.
Last Tuesday Italy's 10-year yields hit their highest since January at 6.6 percent as investors fretted about the cost of a potential sovereign bailout for Spain and the impact this could have on Italy and on the future of the single currency.
Analysts say that any disappointment following the ECB meeting on Thursday would trigger a new bout of bond selling.
"With expectations running high, the scope for disappointment at Thursday's ECB policy meeting has increased considerably," said Nicholas Spiro, sovereign risk consultant.
Burdened with a 2 trillion euro debt and in the grip of recession, Italy has seen its debt costs track Spain's higher as Madrid struggles to retain market access amid budget troubles.
Should Madrid seek further aid after a bank bailout of up to 100 billion euros, investors' attention would turn to Italy, whose economy is twice that of Spain's and whose funding needs are much larger, totaling 450 billion euros this year.
With Monday's sale the Treasury has met around 64 percent of its annual goal. A broad domestic investor base has helped Italy cope with shrinking foreign demand for its debt.
On Monday, Rome also sold 1.28 billion euros of six-month bills at a supplementary sale following an auction on Friday. Requests for less risky short-dated bills totaled an impressive 6.85 billion euros.
Analysts said relatively low bid-to-cover ratios at Monday's bond sale - despite large coupon payments and the Treasury's decision to cancel a mid-August auction due to thin liquidity during the summer season - were an indication of dealers' caution.
The next test for the debt of weaker euro zone countries is on Thursday when Spain will offer up to 3 billion euros of 2014, 2016 and 2022 bonds.
(Additional reporting by London and Milan government bonds teams; Editing by Peter Graff)
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