December 11, 2013 / 11:31 AM / 4 years ago

UPDATE 1-Italy's one-year debt costs inch up as liquidity shrinks

MILAN, Dec 11 (Reuters) - Italy’s one-year borrowing costs inched higher at an auction on Wednesday from the record low they hit a month ago, as banks step up repayment of longer-term European Central Bank loans and reduce excess liquidity on money markets.

The Treasury sold 12-month bills at an average yield of 0.71 percent, marginally above a euro-era record low of 0.69 percent paid in mid-November, soon after the ECB cut its benchmark interest rate.

On Wednesday, Italy sold the planned 5.5 billion euros in bills, meeting requests for 1.6 times that amount. The previous auction was covered 1.8 times.

“The auction was solid, with borrowing costs fundamentally unchanged for the Treasury,” said UniCredit analyst Luca Cazzulani. “The bid-to-cover fell slightly, but I would not attach too much importance to that: at these yield levels some investors may start switching into longer maturities.”

An acceleration in repayments of longer-term ECB loans has driven up short-term money-market rates lately, analysts say, but a benchmark ECB rate of just 0.25 percent and its loose monetary policy will cap any rise.

Supportive monetary policy in the euro zone has been feeding demand for higher-yielding Italian and Spanish debt. Spain’s 12-month debt costs have also edged up, rising to 0.88 percent at an auction on Tuesday from a record-low 0.68 percent the month before.

Italy has completed its 2013 funding plans ahead of schedule, helped by a record sale of a retail bond last month. In a sign of its comfortable funding position, it cancelled a bond sale planned for Thursday and bought back 3.99 billion euros in bonds on Tuesday.

Demand on Wednesday was helped by redemption flows. Nearly 7.5 billion euros in 12-month paper are maturing this week and a further 17.7 billion euros in bills expire by year-end.

The Treasury will return to the markets at the end of December. Those sales will settle in early January.

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