Italy's borrowing cost falls at auction

ITALY'S one-year borrowing costs fell by more than a percentage point from a month ago to 2.697 per cent at auction yesterday, as large redemptions and lower rates on overnight deposits at the ECB supported demand for short-term paper.

Europe's highest-rated government bonds rose, with German two-year yields dropping to a record.

In mid-June, Italy paid 3.97 per cent to sell one-year bills, its highest cost of funds since December, at an auction that came ahead of crucial elections in Greece and soon after a deal to help Spanish banks that did not fully reassure investors.

Progress on Spain's bank bailout and a deal by EU leaders to allow euro zone rescue funds more flexibility to buy bonds have helped bring down Italian yields from a month ago, although analysts say uncertainty remains high and markets volatile.

"Yields are falling and that's a good sign," said Biagio Lapolla, a strategist at RBS. "Zero rates on overnight deposits with the ECB . . . surely helped. Investors are hunting for good short-term returns, also among 'peripheral' issuers."

Details of the Spanish bank deal have eased pressure on Spanish bond yields, also boosting sentiment towards Italian debt in thin secondary markets.

Italy's 10-year yield dipped below 5.8 per cent yesterday. A month ago it was well above 6 per cent as extreme uncertainty about Greece's future in the euro zone and about Spanish banks and public finances weighed on periphery debt.

Italy yesterday sold the planned €7.5 billion in bills, with bids totalling 1.55 times that amount, marginally down from a month ago. The treasury offered less in new bills than the €10.425 billion maturing mid-July, helping the sale.

It said it was not issuing three-month bills due to the absence of specific cash requirements.

Rates on Austrian, Belgian, French and Dutch securities fell to all-time lows yesterday as banks sought higher returns than they could get from the ECB or from German notes with negative yields. - (Reuters, Bloomberg)