Investors snap up Italian bonds

Investors showed they had more faith in Italy managing its debts than troubled Spain at an auction today, snapping up Italian bonds at some of the lowest interest rates in more than a year.

Despite political risks heaving over the horizon, Italy is now regarded as less of a hot spot in the euro zone crisis than Spain, which faces a combination of popular, regional and market pressure to seek more support from the rest of the EU.

Where Spanish 10-year government bond yields are rising back toward unsustainable levels around 7 per cent, Italy paid just 4.09 per cent to borrow €2.7 billion over five years today compared with 4.73 per cent at the end of August.

That was the lowest yield since May 2011, before Italy was sucked in the euro zone's debt crisis, and brought its total borrowing this year to around 80 per cent of its financing needs.

It also sold €2.93 billion of 10-year bonds maturing in 2022 at 5.24 per cent from 5.82 per cent as well as €1 billion of floating rate notes.

"The issue for the time being is not Italy, the issue is Spain, but they will be pleased they managed to get this one away," said Marc Ostwald, strategist at Monument Securities in London. "Each one of these auctions is a challenge."

The sale came in a week that has seen optimism on European markets evaporate on concerns that Spain was stalling on asking for an aid deal that it was hoped could shore up the euro zone and prevent the debt crisis from spreading.

On Italy, analysts point to risks that an election next year will generate a government that is far less willing than technocrat Prime Minister Mario Monti's administration to plough on with budget austerity.

"With significantly larger funding needs than Spain in the coming years, a severe recession and concerns about the post-Monti political landscape, Italy remains vulnerable to a deterioration in sentiment," said Nicholas Spiro, director at Spiro Sovereign Strategy.

"This was an important sale for the Treasury. The resilience of Italy's debt market to Spanish risk has clearly increased since late July."

Analysts said the bulk of the demand had come from domestic buyers, who hold two-thirds of Italian government debt.

However the head of the debt management office said there had been a pick-up in foreign interest for Italian paper since the beginning of September, when the European Central Bank detailed a bond-buying scheme for weaker euro zone states.

"There has somewhat been a return of foreign demand across the whole Italian yield curve," Maria Cannata told CNBC television.

Reuters