Italian borrowing costs remain high

Thu, Aug 30, 2012, 01:00

Italian bonds trimmed early losses today after the results of a bond auction reassured markets the country still has demand for its debt, but also showed the cost of borrowing remains persistently high.

The main feature of the €7.29 billion sale, the country's first long-term debt auction in a month, was the launch of a new 10-year bond which sold at a yield of 5.82 per cent, the lowest since March.

The sale benefited from the market's high expectations the European Central bank will reveal details of a beefed-up bond buying programme next week as part of a coordinated effort to lower borrowing costs for Spain and Italy.

Italian 10-year bond yields initially fell after the results, having risen in early trading, but last stood 1 basis point higher on the day at 5.79 per cent.

Analysts said this tepid reaction reflected the view that although the auction was positive, Italy still has to pay a high cost to raise money, particularly with long-term bonds which are unlikely to be included in any ECB purchases.

"The fact that with all the speculation about what the ECB is going to do, yields are only 14 basis points lower than at the end of July suggests that investors are still demanding quite high risk premiums to hold Italian debt," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.

The new 10-year bond, expiring in November 2022 , last yielded 5.89 per cent in the grey market where the bond is traded ahead of its official issue on September 3rd.