Italy's five-year debt cost highest since October

Italy paid more to borrow over five years than it has since October at an auction today as lack of progress in forming a new government and worries about Cyprus's bailout hit demand.

The treasury sold €3.91 billion of the new June 2018 bond at a yield of 3.65 per cent, more than the 3.59 per cent it paid to sell similar paper on February 27th, two days after an election in which no party won enough seats to govern.

Borrowing costs had jumped 66 basis points at the February sale on fears that a prolonged political stalemate would stall reforms needed to revive Italy's stagnant economy and address its massive €2 trillion debt pile.

The country's cost of five-year funding is now at its highest level since October 2012, shortly after the European Central Bank pledged to buy bonds of struggling euro zone countries that ask for help.

"Overall it looks like a rather weak auction. Volumes seem all right ... but when we turn to the pricing side it looks quite weak," Commerzbank senior strategist Michael Leister said.

Today's auction saw the cost of 10-year borrowing fall from last month, however, and the Treasury sold almost the maximum €7 billion offered.

Rome paid a yield of 4.66 per cent to sell the €3 billion of 10-year bonds, down from 4.83 per cent in late February sale and the lowest level since January.

Analysts said general risk aversion among investors after international lenders imposed tough conditions in return for bailing out euro zone member Cyprus had weighed on demand, as had the extended political limbo in Italy itself.

Ex-comic Beppe Grillo's anti-establishment 5-Star Movement today flatly rejected overtures from centre-left leader Pier Luigi Bersani, who has been talks with rival parties this week to try to form a government.

His chances of mustering the numbers needed appear slim, however, and the country may be heading for fresh elections.

"We have had comments from Bersani and that is reminding the market that in Italy there is further noise on the cards given that they still have to find a government," Mr Leister said.

Persistent market rumours that credit rating agency Moody's is about to downgrade Italy because of the political uncertainty and weak growth outlook have also unsettled investors.

The treasury declined to comment on the rumour on Wednesday, while Moody's told Reuters it was watching Bersani's attempts to form a government and its implications for Italy's rating.

Moody's rates Italy Baa2, two notches above "junk" grade, with a negative outlook.

European shares extended losses after the auction, led lower by shares in Italy and its indebted euro zone peer Spain, while Italian bond yields rose on the secondary market and those on safe-haven German and US bonds fell.

The cost of insuring Italian and Spanish debt against default also rose today as investors continue to fret about the implications of the Cyprus rescue for other sovereigns seen as candidates for a bailout.

Reuters