* Six-month auction yields halve to 3.25 pct from end-Nov
* Bond sale for up to 8.5 bln euros to be held Thursday
* First debt sale since ECB 3-yr tender, new govt budget
By Valentina Za
MILAN, Dec 28 Italy's short-term debt
costs halved at auction on Wednesday as a new austerity package
and an injection of cheap long-term money from the European
Central Bank won Rome some respite in thin year-end markets.
But analysts warned that market nerves could easily reignite
and pointed to a tougher test on Thursday, when Italy will sell
up to 8.5 billion euros ($11.1 bln) of longer-term bonds,
including three- and 10-year paper.
Still, the lowest six-month auction yield and strongest
bid-to-cover ratio since September added to a sense that some of
the tension around the countries now at the centre of Europe's
debt problems had eased for a moment.
The outcome provided a temporary boost to European stocks
and the euro. Caution returned later in the session
pushing Italian bond yields higher ahead of Thursday's sale.
"This is the first piece of good news for Italy's bond
market since the crisis erupted (for Rome) in July," said
Nicholas Spiro of Spiro Sovereign Strategy.
"While today's auction was supposed to be the less
challenging of this week's two sales given the shorter maturity
of the debt on offer and the predominantly domestic buyer base,
it's still a success."
Italy paid an average rate of 3.25 percent to sell 9 billion
euros of six-month BOT bills, down from a euro lifetime record
of 6.50 percent just a month earlier. It also sold 1.7 billion
euros of 24-month, zero-coupon bonds, near the low end of its
target range. The yield fell to 4.85 percent, from 7.8 percent a
Since then the ECB has flooded euro zone banks with almost
500 billion euros of longer-term liquidity and the Rome
government has overcome internal opposition to a radical pension
reform as part of Italy's third budget package since the summer.
Spain's six-month debt costs also more than halved to 2.4
percent at an auction on the eve of the ECB's bumper tender for
three-year money on Dec. 21.
"Many things have changed from a month ago," an Italian bill
trader said. "This doesn't mean we can rule out further
problematic auctions. Markets are easily unnerved."
Doubts about how much of the ECB money would find its way to
troubled government bonds have weighed on Italian and Spanish
yields and investors are mindful that Rome must refinance some
91 billion euros in bonds in the first four months of next year.
Italian 10-year yields reversed an earlier
fall to climb back above 7 percent in the afternoon, ahead of
Thursday's auction. That pushed the premium over safer German
Bunds above 500 basis points in thin trading.
While Rome can count on healthy appetite from domestic
retail investors for short-term bonds and bills, longer-term
debt sales are a better measure of underlying interest from
"Demand for short term paper is good. It remains to be seen
whether this extends to the longer maturities," said Credit
Agricole strategist Peter Chatwell.
Italy paid a euro lifetime record high yield of 7.56 percent
to sell 10-year bonds at the end of November and even more to
sell three-year paper in a sign of the nervousness in the
Traders say that the ECB targets maturities only up to
10-years in its bond buying programme, further limiting the
appeal of longer term Italian issues for primary dealers.
Standard & Poor's - which is expected to release its eagerly
awaited verdict on debt ratings for 15 euro zone countries in
January - has warned that the first quarter of next year will be
"tough", especially for Italy.
In a push to regain market confidence, Italy's parliament
gave the final seal in the run-up to Christmas to an emergency
austerity budget rushed through by a new technocrat government.
Market attention has now turned to the reform agenda of
Prime Minister Mario Monti who has promised to tackle Italy's
chronic low-growth problems - after inaction by former PM Silvio
Berlusconi pushed the country to the brink of financial
"Italy needs some breathing space to implement its
reforms. Yet market pressures are set to intensify in the coming
weeks given the large amount of debt falling due in the first
quarter alone," Spiro said.
Monti has convened a cabinet meeting on Wednesday to outline
his plans and he could provide some indications to investors in
his traditional year-end press conference on Thursday.
Analysts expect Monti's 33 billion euro austerity package to
further harm Italy's weak internal demand, making efforts to
revive growth through a series of long-delayed liberalisations
even more crucial.
Totalling more than 15 billion euros, demand for the BOT
bills equalled nearly 1.7 times the amount of offer and was also
much larger than BOT redemptions totalling 8.8 billion euros.