Italy to pass first debt market test as Monti readies to quit

MILAN Tue Dec 11, 2012 7:01pm EST

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MILAN Dec 12 (Reuters) - Hefty debt redemptions will help Italy to draw good demand for short-term paper at an auction on Wednesday, when the treasury faces its first market test after Prime Minister Mario Monti's decision to leave office early.

The unelected caretaker announced on Saturday his intention to resign as soon as the 2013 budget law is approved after it lost the support from Silvio Berlusconi's centre-right PDL party, the largest in the Italian parliament.

Monti's sudden announcement sparked investors' concern that Italy may stray from a path of economic reforms in the aftermath of general elections now scheduled to take place in February, a few weeks ahead of what had been anticipated.

Financial strategists says Italy will battle with renewed market volatility for months to come. But they expect Rome to easily find buyers for its one-year BOT bills on Wednesday.

"I expect healthy demand and a limited premium on the BOT bill curve for the new 12-month," said Elia Lattuga, strategist at Unicredit in Milan. "Market sentiment appears to have stabilized and large negative net supply should be very supportive factor for the auction."

The treasury, which is due to complete its 2012 funding this week, will tap the market for 6.5 billion euros ($8.45 billion) of the 12-month bill, but will not sell any three-month bills.

This compares with redemptions worth 10.7 billion euros for three- and 12-month bills in mid-December. A further 6.5 billion euros of short-dated paper will come due at the end of the month.

Concern about renewed political uncertainty in Italy pushed borrowing costs higher across the yield curve on Monday.

Strategists say Rome could pay a yield of about 1.70 percent for its bills on Wednesday, below the 1.76 percent it paid last month but higher than a trough of around 1.25 percent hit before political tensions in Italy reversed a strong debt market rally.

The rise in Italian borrowing costs for longer-dated paper could even play in Italy's favour at a three-year bond auction on Thursday as it may woo risk-prone investors.

"I expect investors will be lured by the recent rise in the three-year bond yield," said Alessandro Giansanti, strategist at ING.

This week's debt auction will be the last Italian sale to be completed this year. Rome will come back to markets at the end of December with two sales to be settled early in 2013.

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