December 12, 2012 / 11:31 AM / 5 years ago

UPDATE 1-Italy passes first debt test after Monti's exit plan

By Francesca Landini

MILAN, Dec 12 (Reuters) - Italy lowered its borrowing costs at a one-year debt auction on Wednesday, clearing its first market hurdle since Prime Minister Mario Monti announced his intention to leave office early.

One-year debt yields fell to their lowest in nine months as hefty redemptions boosted liquidity on the market.

The European Central Bank’s September pledge that it stands ready to buy bonds of vulnerable euro zone countries continued to shield Italian debt, providing an effective counterweight to Italian political uncertainty, analysts said.

The treasury sold 6.5 billion euros one-year bills as planned and paid a yield of 1.46 percent, down from 1.76 percent one month ago.

A sell-off on Monday following Monti’s announcement pushed yields well above a trough of around 1.25 percent reached at the end of November, making Italian bills more appealing.

“Investors saw Monday’s sell-off as an opportunity to buy Italy at a cheaper price,” said Chiara Corsa, strategist at Unicredit in London.

“The steep fall in the yield at auction is a good signal if you consider what happened during the weekend.”

Monti announced on Saturday his intention to quit as soon as the 2013 budget law is approved after losing support from Silvio Berlusconi’s centre-right PDL party, the largest in the Italian parliament.

The announced early exit of the technocrat premier sparked investors’ concern that Italy may stray from a path of economic reforms in the aftermath of general elections now scheduled to take place in February.

However strategists see the ECB bond-buying scheme as an effective counterweight to Italian political risk, for now, and expect Rome will meet its borrowing target for this year with a bond auction on Thursday.

“With the ECB’s fiscal backstop in place, investors are much less concerned about Italian debt,” said Nicholas Spiro at Managing Director at Spiro Sovereign Strategy.

Italy will sell new three-year debt alongside an existing 2026 bond, planning to raise up to 4.25 billion euros.

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