December 20, 2018 / 3:59 PM / in a month

UPDATE 1-Foreigners sold 3.4 bln euros of Italian government debt in Oct

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MILAN, Dec 20 (Reuters) - Foreign holdings of Italian government bonds fell by 3.4 billion euros ($3.9 billion) in October, central bank data showed, bringing the overall drop since a populist government coalition first emerged in mid-May to more than 72 billion euros.

Unnerved by the anti-austerity and anti-European stance of the Italian government, foreign investors have been shedding Italian debt in recent months, pushing up borrowing costs for Rome.

In October, the gap between Italy’s 10-year BTP bond yields and their German equivalent rose to a five-and-a-half-year high of 340 basis points.

The sales in October were mainly of short-term bonds, the Bank of Italy said on Thursday in its balance of payments release.

After months of tension, the Italian government reached an agreement with the European Commission on Wednesday over its budget for next year, avoiding a disciplinary procedure and luring back buyers for its debt.

“I think the trigger was that the government decided to stop arguing and compromised with Brussels,” said Alessandro Tentori, chief investment officer at AXA Investment Managers Italia.

But markets still doubt whether the current truce between Rome and Brussels on the budget will provide long-term relief for Italian government bonds.

“In 2019, markets will stop discussing the budget itself as the trigger for market volatility, but will focus instead on the economic slowdown, and so on a much longer-term theme,” Tentori said.

On Thursday, the spread between Italy’s 10-year BTP yield and that of German Bunds fell below 250 basis points on Thursday, to its lowest level since end-September.

“We are still sceptical about the real figures on which budget targets are based, and about how long the truce will be within the Italian government and between it and the European Commission,” Aberdeen Standard Investments economist Stephanie Kelly said in a note. ($1 = 0.8718 euros) (Reporting by Giulio Piovaccari; Editing by Kevin Liffey)

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