By Valentina Za and Emelia Sithole-Matarise
ROME/LONDON Jan 30 Italy's funding costs fell
at auction on Thursday, with demand from yield-hungry investors
sending returns on its five-year debt to a euro lifetime low as
emerging markets tumbled and prices of top-ranked bonds rose.
Large reinvestment flows from maturing debt and coupon
payments this week likely fed demand, helping Italy raise 8.46
billion euros ($11.5 billion), near the top of its planned
Its benchmark 10-year borrowing costs fell to 3.81 percent
from 4.11 percent at a similar auction a month ago, matching a
level last seen in August 2010. The five-year bond, a new issue,
sold at a record low of 2.43 percent, well below the 2.71
percent it yielded in late December.
This helped stabilise Italian 10-year yields
at 3.86 percent, unchanged on the day but outperforming other
lower-rated euro zone peers where activity was subdued by the
selloff in emerging market currencies.
"Overall a good auction that bears witness to the market's
buoyant mood towards Italian paper as better economic
fundamentals in the euro zone's periphery help insulate it from
volatility on emerging markets," ING strategist Alessandro
Worries about emerging economies are intensifying after
policy moves in Turkey, India and South Africa failed to stem an
exodus of capital. The Federal Reserve's decision to withdraw
more of its monetary stimulus and weak Chinese data are fueling
Analysts said that a higher risk premium on Italian bonds
versus German benchmarks is likely to have boosted their appeal
"The recent (spread) re-widening both versus Germany and
Spain might have been seen as a good buying opportunity for
Italian bonds today," Newedge Strategy's Annalisa Piazza said in
The five-year bond in particular attracted healthy demand.
Analysts said that good interest came from domestic investors
looking to reap higher returns by extending the average life of
their portfolios as ultra-easy monetary policy in the euro zone
keeps a lid on short-term rates.
Bonds issued by the euro zone's weaker economies, apart from
junk-rated Greek and to a lesser extent Portugal, have been
largely resilient to the turbulence in emerging markets.
RBS strategist Harvinder Sian said some of the cash flowing
out of emerging markets could find a home in Italian, Spanish
and Irish bonds, for which sentiment has been bolstered by the
European Central Bank's accommodative policy and an improved
economic growth outlook.
"The weakness in emerging markets actually favours, on a
medium-term flow basis, the euro zone periphery," Sian said.
"The developed markets went into crisis in 2008/09 and
investors looked across and found emerging markets more
attractive ...That flow is now beginning to reverse back to the
At the euro zone's core, German 10-year debt yields
were down 2.4 bps at their lowest levels in nearly
six months around 1.62 percent. Bund futures were 32
ticks higher at 143.21 with traders saying month-end related
buying added to the gains.
"Fears of a crisis in emerging markets is supporting Bunds
and that's why we saw the Bund auction yesterday doing very well
despite some dealers thinking it was very expensive," one trader
said. "We saw a big asset allocation into Germany and I think
the market got caught a bit short."