* 10-yr auction yield rises to six-month high of 6.19 pct
* Treasury sells 5.42 bln eur, near top of target range
* EU summit unlikely to trigger drop in yields - analysts
By Valentina Za
MILAN, June 28 Italy's benchmark borrowing costs
hit six-month highs at auction on Thursday, piling pressure on
Prime Minister Mario Monti to ease a steepling debt burden by
squeezing concessions out of Germany at a European summit later
in the day.
The Treasury sold 5.42 billion euros in 10-year bonds, near
the top of its lower-than-average target range, helped by
domestic demand fed by large redemption flows.
But 10-year yields rose to 6.19 percent from 6.03 percent a
month ago, fuelling concern on markets.
"The good news is that the Treasury once again got its debt
out the door. The bad news is that the yield levels are
punitive," said Nicholas Spiro at Spiro Sovereign Strategy.
Weakened by falling popularity and a fractious political
climate as Italy sinks deeper into recession, Monti is anxious
to gain some relief at the Brussels summit for the painful
borrowing costs now being borne by the world's fourth-largest
Italian President Giorgio Napolitano highlighted the
difficult political situation on Thursday, saying he was worried
by the increasing tensions among the parties backing Monti's
French President Francois Hollande said he wanted "very
rapid solutions" to help countries that face difficulties on the
markets. But German Chancellor Angela Merkel has shown no sign
of giving up her refusal to underwrite other euro zone
Berlin pays only a quarter of the interest to sell its
10-year debt that Rome does.
In a bid to strengthen his bargaining position with EU
partners ahead of the summit, Monti won parliamentary backing
late on Wednesday for a long-delayed labour reform.
He has also said he was prepared to go on negotiating into
Sunday evening if necessary to agree on measures to calm markets
before they re-open next week.
But Germany is sceptical about new tools to stem the crisis,
and wants fiscal controls to be place before agreeing to any
joint liability for debt.
A German government source warned on Thursday against
"exaggerated panic-mongering" over Spanish and Italian yields.
Italy also sold a five-year bond at an average 5.84 percent
on Thursday, up from 5.66 percent a month ago and the highest
since a euro-lifetime peak of 6.5 percent in December.
Later on Thursday the Treasury placed another 825 million
euros of the two bonds, at a supplementary auction held a day
early because of a public holiday in Rome on Friday.
Primary dealers also bought another 1.35 billion euros of a
six-month bill auctioned on Wednesday at a yield near 3 percent.
Ireland's finance minister said on Thursday that measures to
lower Italian yields would top the summit agenda. But analysts
expect Italian and Spanish bond yields to remain under pressure.
"The summit is likely to take a step in the right direction,
but ultimately underwhelm," said Citi analyst Jamie Searle.
Monti's political woes have contributed to the rise in
Italian yields and investors are looking with alarm at the
possibility of early elections in the euro zone's third economy.
"I believe the outcome of the EU summit will disappoint,"
said Biagio Lapolla, a strategist at RBS in London.
"Given that Italian parties do not expect Monti to come back
empty-handed, attention may then turn to Italy's political
scene, and it would not be positive."
Domestic demand has helped the Treasury to meet roughly 58
percent of its annual funding plan so far, while foreign
investors continue to shun Italian bonds.
But analysts say Italian lenders may find it increasingly
hard to keep shouldering the bulk of the Treasury's issuance.
Italy's third-largest bank, Monte dei Paschi di Siena
, said on Wednesday it would reduce its Italian bond
holdings, after tapping state aid this week to fill a capital
gap partly due to its large exposure to sovereign risk.