MILAN Italian borrowing costs rose slightly at an auction on Monday with investors remaining unperturbed by questions hanging over the next government just hours before results of a closely contested general election.
The treasury sold 2.82 billion euros ($3.71 billion) of two-year zero-coupon bonds, just below a maximum planned amount of 3 billion euros.
It paid a yield of 1.68 percent, up from 1.43 percent at a similar sale one month ago. But the yield also compares with that on the secondary market - 1.80 percent - and with a 2012 peak of 4.86 percent touched in July before the European Central Bank's pledge to buy government bonds of weaker euro zone countries.
Demand was 1.65 times the offer, up from a bid-to-cover of 1.45 at an end-January auction.
"It's a good result as far as yields are concerned," said Alberto Gallo, credit strategist at Royal Bank of Scotland.
"The sentiment on the market is positive so far, but I think it is not pricing in completely the risk of a divided government."
Opinion polls have suggested the center-left Democratic Party (PD) of Pierluigi Bersani could secure a narrow victory in the recession-hit country, the euro zone's third-largest economy.
But the rise of anti-establishment comedian Beppe Grillo's 5-Star Movement and the poll comeback of center-right leader Silvio Berlusconi have cast doubt over Bersani's ability to govern even if he forms a coalition with the centrist party of outgoing technocrat Prime Minister Mario Monti.
Exit polls are due soon after 9 a.m. EST, with some analysts predicting a possible relief rally if preliminary results point to a pro-reform center-left government.
However, a clear political picture may emerge well after Monday's market close, with official results expected by early Tuesday.
On Monday Italy also sold 1.25 billion of two inflation-linked BTPei bonds maturing September 2021 and September 2026 respectively, bringing the total debt issued today to 4.07 billion euros, just below the top-planned amount.
(Reporting by Francesca Landini; Editing by Lisa Jucca/Jeremy Gaunt)