August 30, 2018 / 10:57 AM / a year ago

UPDATE 1-Italian yields hit 4-year highs in sovereign bond auction

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MILAN, Aug 30 (Reuters) - Italian borrowing costs on five-year and 10-year debt rose to their highest in over four years at a bond auction on Thursday as investors continue to fret over the upcoming 2019 budget.

The auction is closely watched as a litmus test of investor appetite for Italian debt, a day before credit rating agency Fitch is due to assess Italy’s creditworthiness.

The Treasury sold 7.75 billion euros ($9.06 billion) in four bonds — two fixed-rate bonds and two floating-rate bonds - at the top of the issuance range.

Demand was strong, with investors attracted by recent rises in Italian yields compared to their euro zone peers.

“(The auction) clearly underscores that valuations have reached levels where investors feel increasingly comfortable to put money back to work,” said Christoph Rieger, head of rates strategy at Commerzbank.

Investors are concerned that tax cuts and welfare spending proposed by the ruling coalition could push up Italy’s debt, the highest among major euro zone nations.

Rome will unveil new public finance targets in September and the cabinet will approve the budget in late October.

Italy’s economy minister has urged the ruling coalition’s two political leaders to tone down their comments on the forthcoming budget, saying inconsistent messaging has been damaging, daily Il Messaggero reported on Thursday.

In recent weeks, Economy Minister Giovanni Tria has sought to reassure markets of the new government’s commitment to cutting its heavy debt burden while the two deputy prime ministers have demanded that the European Union allow their new government to pursue a more expansive budget.

Fixed-income strategist Chiara Cremonesi, of UniCredit, said the auction results could boost Italian debt in the secondary market.

“However we must bear in mind that Italy’s budget is still pending, so the market will remain cautious despite the enthusiasm that this auction could generate,” Cremonesi added.

The 10-year bond issue fetched a gross 3.25 percent yield, up from the 2.87 percent Italy paid a month ago, and the highest since March 2014. It drew bids equivalent to 1.37 times, down from the 1.42 times at the previous auction.

Italy also sold a new five-year bond at a yield of 2.44 percent, up from 1.80 percent it paid one month ago, and the highest level since December 2013. Bid-to-cover was 2.12.

The Treasury sold 1.75 billion euros over two floating-rate bonds maturing in September 2025 and October 2024. ($1 = 0.8551 euros) (Reporting by Elvira Pollina and Francesca Landini in Milan and Virginia Furness in London, Additional reporting by Giulia Segreti in Milan, Editing by Mark Bendeich)

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