Italy's borrowing costs surge again


Italy's two-year yield hit an eight-month high of 4.86 per cent at a sale of zero-coupon paper today, tracking Spain's borrowing costs higher as investors fret about the two economies most vulnerable to the worsening debt crisis.

This was the highest yield Italy has paid to borrow on this maturity since a euro lifetime high of 7.81 per cent it paid at the height of the crisis in November, when the country was seen on the brink of financial collapse.

The yield at a similar sale a month ago was 4.71 per cent.

Today, Italy sold the top planned amount of €2.5 billion in zero-coupon bonds due in May 2014, with the generous yield spurring demand from domestic players.

The auction was covered 1.78 times, up from 1.65 at a slightly bigger sale a month ago.The small size also helped the treasury push the auction through, after it decided not to offer inflation-linked paper at today's sale as it would have normally done.

A sovereign downgrade by Moody's this month is forcing Italian linkers out of some indices, leading some funds to sell their holdings.

To ease pressure on these assets, Italy bought back €1.3 billion of its own linkers at an exchange auction yesterday.

Concerns about Spain's budget and banking troubles and the impact that a possible loss of market access for Madrid would have on Italy fuel markets' risk aversion, quashing appetite among international investors for bonds issued by the two debt-laden countries.

Italy's treasury returns to the market tomorrow with an €8.5 billion sale of six-month bills and faces a tougher test on Monday when it will sell five and 10-year bonds.