UPDATE 1-Italy vaults last 2012 funding hurdle

Thu Dec 13, 2012 5:53am EST

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By Francesca Landini

MILAN Dec 13 (Reuters) - Italy's cost of borrowing over three years fell to the lowest since late 2010 at an auction on Thursday, shielded from domestic political turmoil by the European Central Bank's pledge to aid vulnerable euro zone members.

Rome sold nearly 3.5 billion euros ($4.56 billion) of the new BTP bond maturing December 2015 and paid a yield of 2.50 percent. This was down from 2.64 percent on a similar sale a month ago and the lowest since October 2010.

Prime Minister Mario Monti's announcement of a plan to resign sparked a sell-off on Monday. But buyers in search of appealing returns soon came back to Italian bonds given that an ECB bond-buying scheme provides an effective backstop for peripheral euro zone debt.

The auction allows Rome to complete its heavy funding programme after a rollercoaster year of crisis. The treasury will have to issue around 420 billion euros in 2013 to refinance its 2 trillion euros debt.

"It shows there is ongoing support for short-term (debt on the) Italian curve from investors, mainly domestic investors," said Alessandro Giansanti, strategist at ING in Amsterdam.

"There are mounting expectations that we can have lower interest and deposit rates from the European Central Bank in the next months. I think the market is not fully pricing in the political risk coming from elections."

The treasury also sold 0.729 billion euros of a 15-year bond, issuing a total amount of 4.22 billion euros, just short of its top planned amount of 4.25 billion euros.

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