By Francesca Landini
MILAN Nov 29 (Reuters) - Italy's 10-year bond yield hits its lowest in two years at an auction on Thursday, buoyed by a deal this week on Greek debt which has eased near-term risks for the governments under fire in the euro zone's debt crisis.
Thursday's was the last auction settled this year for Italy's 10-year bonds and brought Rome to within spitting distance of meeting its 2012 funding requirements.
The treasury sold 2.98 billion euros of 10-year bonds, just shy of the maximum targeted amount, and paid a yield of 4.45 percent on Thursday, down almost 50 basis points from an end-October sale.
A year ago, shortly after technocrat Mario Monti took over from scandal-plagued premier Silvio Berlusconi, the treasury had to pay a record 7.56 percent to draw bids for its 10-year bonds.
"An auction of Italian 10-year debt at 4.45 percent was almost unthinkable a year ago," said Nicholas Spiro, Managing Director at Spiro Sovereign Strategy. He noted, however, that the 1.18 bid to cover was lower than the average of the previous three sales.
Italian borrowing costs have been falling steadily since the European Central Bank laid out plans in August and September to buy the bonds of weaker euro zone countries with a maturity of up to three years.
While that had so far benefitted mostly shorter-dated paper, the pledge has also proved a game changer for longer-dated debt.
Sentiment has been helped over the past three days by a deal struck on Monday night to open the way for international lenders to release the next tranche of aid for Greece.
"The hunt for yield continues and the market seems very happy to leave Greece and other question marks like Spain and the U.S. fiscal cliff aside and look at the glass almost full, not even half full," said Michael Leister, a strategist at Commerzbank in London.
Investors also bagged 3 billion euros of a five-year bond, receiving a return of 3.23 percent, down from 3.80 percent one month ago, at the lowest level since October 2010.
After this week's sale the treasury will only offer bills and three-year bonds at mid-December sales, while the end-December auction for five and 10-year bonds will tap funds for 2013.