November 28, 2012 / 11:47 AM / 6 years ago

UPDATE 1-Italy's 6-month yields fall to pre-crisis level

* Six-mth yields dip under 1 pct, lowest since April 2010

* Borrowing costs stood at 6.5 pct on same issue a year ago

* Rome will offer five- and 10-year bonds on Thursday (Adds analyst’s comment, details)

By Francesca Landini

MILAN, Nov 28 (Reuters) - Italy paid less than 1 percent to sell 7.5 billion euros of six-month bills on Wednesday, its lowest in more than two years and a far cry from the 6.5 percent it paid exactly a year ago when investors were fretting over an Italian default.

A deal on the next tranche of Greek aid and the underlying support offered by the European Central Bank emboldened investors at an auction on Wednesday that saw yield fall to levels seen before the sovereign debt crisis engulfed Italy.

Six-month borrowing costs dipped to 0.919 percent, the lowest level since April 2010 and below the 1.347 percent paid at a similar sale at the end of October.

“From a pricing perspective, Italy has overcome the eurozone crisis,” said Nicholas Spiro, Managing Director at Spiro Sovereign Strategy.

“The result of this morning’s auction underscores the dramatic shift in market sentiment towards Italy over the past several months,” he added.

Demand was 1.65 times the offer at Wednesday sale, up from a bid-to-cover ratio of 1.52 at end-October auction.

An amount of 8.5 billion euros bills coming due at end-November also boosted investors appetite.

Analysts said Wednesday’s auction results bode well for a tougher market test on Thursday, when Rome offers up to 6 billion euros of five- and 10-year bonds in the last sale for these long-term maturities in 2012.

After this week, Italy will have met more than 95 percent of its 2012 funding needs on its 2 trillion euro debt.

Next year’s borrowing target looks less challenging, but with uncertainty hanging over the outcome of a key general election expected in March, Rome will need to stay on guard.

“Italy is by no means out of the woods and has become a tale of two halves: an increasingly resilient and externally driven bond market and an economy in deep recession amid mounting political uncertainty,” said Nicholas Spiro.

On the market, Italian 10-year government bond yields fell to their lowest since June 2011 just before the bill sale, as high-yielding euro zone debt markets benefited from the reduced risk of an immediate Greek default. ($1 = 0.7733 euros) (Editing by Lisa Jucca, additional reporting by Elvira Pollina and Giulio Piovaccari in Milan; Editing by Toby Chopra)

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