By Francesca Landini
MILAN Nov 27 Italy's two-year borrowing costs
fell to their lowest in more than two years at an auction on
Tuesday, as an agreement by Greece's international lenders to
help cut its debt and release more aid helped market sentiment.
Investors have been reassured, at least for now, by the
austerity measures carried out by Italy's technocrat government
and the prospect of the European Central Bank's bond-buying
scheme. That's helped Europe's third-largest economy steer
borrowing costs down towards pre-crisis levels.
The treasury sold 3.5 billion euros ($4.54 billion) of
two-year zero-coupon bonds, paying a yield of 1.923 percent --
down from 2.397 percent at a similar sale one month ago and the
lowest since October 2010.
"The fall of the yield under the 2 percent threshold is a
good result for the Italian treasury," said Luca Cazzulani,
deputy head of fixed-income strategy at Unicredit in Milan. "The
deal on Greece has eased tensions on the market and boosted
demand for Italian paper."
Sentiment was bolstered after euro zone finance ministers
agreed on Monday a package of measures that will reduce Greek
debt to 124 percent of gross domestic product by 2020. Eurogroup
Chairman Jean-Claude Juncker said the ministers would formally
approve the release of aid to Greece, removing uncertainty over
whether Athens could avoid near-term bankruptcy.
At Tuesday's auction, demand for CTZ zero-coupon bond was
1.5 times the offer and allowed Rome to place the top planned
amount of 3.5 billion euros. Italy also sold the whole targeted
1 billion euros of two inflation-linked BTPei bonds with
maturity Sept. 2019 and Sept. 2026.
Tuesday's sale will be the last Italian zero-coupon bond to
be completed this year. Although Rome has already met more than
95 percent of its challenging borrowing target of 460-465
billion euros for 2012, lower rates have encouraged the treasury
to continue to sell debt.
Even with yields falling, Rome's debt looks attractive to
investors. Liquidity is abundant on the bond market and returns
on debt of core euro zone countries are negative or very low,
French T-bill yields dipped at an auction on Monday into
negative territory in the first debt sale after Moody's stripped
Paris its triple A rating last week. The same
day, Belgium's borrowing costs fell to new record lows at 2.25
percent on the 10-year benchmark bond.
However, short-term debt like that sold at Tuesday's auction
is usually bought by Italian banks. A bigger test of how
international investors view Italy will come on Wednesday, when
Rome will offer 7.5 billion euros of six-month bills, and then
on Thursday, when it will sell up to 6 billion euros of five-
and 10-year bonds.
While bond yields are returning to normal, the Italian
economy will remain mired in recession next year. Paris-based
Organisation for Economic Co-operation and Development said on
Tuesday the euro zone's third-largest economy will shrink by 1
percent in 2013 and the fiscal deficit will be far above target.