CORRECTED-UPDATE 1-Italy debt offering sends 3-year yields below 2 percent

Fri Jan 11, 2013 7:06am EST

(Corrects paragraph three to refer to three-year yields)

MILAN Jan 11 (Reuters) - Return-hungry investors snapped up Italian bonds at an auction on Friday, pushing yields on three-year paper below 2 percent for the first time since March 2010 with and little concern shown for the upcoming general election.

The treasury sold 3.5 billion euros of three-year bonds paying a yield of 1.85 percent, down from 2.5 percent at a similar sale a month ago.

While three-year yields fell by 65 basis points at Friday's sale, they continue to look attractive compared with near-zero return on equivalent German Bunds.

Italy, along with Spain, is one of the main beneficiaries of the European Central Bank's pledge to buy bonds if a euro zone country gets into trouble and needs a bailout.

This promise is acting as a backstop for investors, particularly with shorter-dated debt which the ECB will target.

Rome also issued 1.5 billion euros of two floating rate CCTeu notes maturing in June 2017 and October 2017, bringing the total debt sold on Friday to the top-targeted amount of 5 billion euros.

"The auction went really well," said Chiara Manenti, fixed-income strategist at Intesa Sanpaolo.

"With these borrowing costs Italy is set to save quite a lot of money for servicing its debt compared with official estimates of 89 billion euros for this year."

The sale marks a positive start of the year for the treasury, which has a gross borrowing target of around 420 billion euros in 2013, 10 percent less than last year.

More evenly-spread debt redemptions are set to give Rome greater flexibility in planning its funding. But market volatility could increase closer to a general election scheduled on Feb 24-25.

Polls point to a victory of the centre-left PD party, which is expected to continue on the path of reforms started by the technocrat government of outgoing Prime Minister Mario Monti.

(Reporting by Francesca Landini, editing by Silvia Aloisi/Jeremy Gaunt)

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