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

Fri Jan 11, 2013 8:00am EST

* Italy sold top targeted amount of 5 bln euros

* Yields on 3-year bond dipped to lowest since March 2010

* Treasury will have to borrow 420 bln euros in 2013

By Francesca Landini

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 little concern shown for the upcoming general election.

The treasury sold 3.5 billion euros ($4.62 billion) of three-year bonds paying a yield of 1.85 percent.

While this was 65 basis points below a mid-December auction, the yields continue to look attractive to investors compared with near-zero return on equivalent German paper.

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's Outright Monetary Transactions (OMT) scheme will target.

"There's still ongoing demand for the area that's covered by the OMT programme so investors feel more confident to put money there and there's still a huge (return) potential if you consider core yields still trading close to zero," said ING strategist Alessandro Giansanti.

For the time being, the ECB's bond-buying pledge has more than offset uncertainty surrounding the outcome of Italy's February elections.

"It's a pretty solid auction. They met their target, yields are lower and demand is pretty strong, " said Nick Stamenkovic, bond strategist at RIA capital markets.

"Investors don't seem to be worried about the political obstacles facing Italy next month."

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.

Analysts say markets seem to be reassured by the fact that Monti himself decided to enter the election race and run for a second term with the support of a coalition of centrist parties.

However, some commentators say that could lead to a more fragmented political landscape after the polls, with the battle for the Senate looking particularly uncertain.

In 2013 Italy will have to borrow around 420 billion euros, roughly 10 percent less than last year.

More evenly-spread debt redemptions are set to give the treasury greater flexibility in planning its funding. But Rome needs a protracted period of calm on fianncial markets to lure back foreign investors and lenghten the average life of Italian debt.

On Friday 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 the day to the top-targeted amount of 5 billion euros.

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