May 28, 2012 / 10:21 AM / 7 years ago

UPDATE 1-Yields rise at Italy 2-yr debt sale

MILAN, May 28 (Reuters) - Italian two-year borrowing costs rose to their highest since December at a sale of zero-coupon paper on Monday as the prospect of a possible Greek euro exit and Spain’s banking woes continued to weigh on the debt of weaker euro zone borrowers.

Italy sold 3.5 billion euros of a new May 2014 zero-coupon bond, the top of its planned range for the tender, and the yield of 4.037 percent was almost half of highs reached late last year.

But a month ago, before inconclusive Greek electoral results further clouded the outlook for the euro zone, Italy had sold a similar bond at an average 3.36 percent.

Opinion polls showing Greece’s pro-bailout conservatives have regained a lead ahead of new general elections gave markets some relief on Monday, but a government bailout of Spain’s fourth biggest lender Bankia underlined the depth of concern over its larger economies and the future of the euro.

“Things have got worse over the last month. It’s not as bad as we’ve seen at the direst moments of this crisis however, and we are to hope we won’t get there again,” an Italian bond trader said.

Spanish 10-year bond yields rose to 6.5 percent on Monday, their highest since November 2011 and putting the premium investors charge compared to German government debt at the highest since the launch of the euro.

In late November, when Italy was at the top of markets’ list of concerns in the crisis, the yield on its two-year, zero-coupon bonds hit a euro lifetime record of 7.8 percent. The same yield stood at just below 5 percent in December.

On Monday, interest from domestic investors supported bids for the two-year bond, which totalled 1.7 times the amount sold, slightly down from 1.8 times a month ago.

Rome returns to markets on Tuesday to offer 8.5 billion euros of six-month BOT bills. But this week’s hardest test is on Wednesday, when the Treasury will sell up to 6.25 billion euros of five- and 10-year bonds.

Longer-term maturities pose a greater challenge for the Treasury as domestic demand mostly targets the short-end of the curve and foreign investors have cut their holdings of Italian debt.

Estimates now point to foreign ownership amounting to only about a third of Italy’s total debt when excluding purchases made by the European Central Bank under its bond-buy programme. A few months back foreign investors held about a half of Italy’s sovereign debt.

On Monday, Italy also sold a total of 751 million euros of two euro zone linkers due in 2016 and 2017, again at the top of its planned target range.

Italy will offer an Italian inflation-linked bond aimed at small investors next week. The first such issue earlier this year brought a much larger than expected 7.3 billion euros into the Treasury’s coffers.

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