Italy yields fall at bonds sale

Italy's longer-term borrowing costs fell to their lowest since October at a bond sale today seen as a test of the country's ability to raise the funds it needs to meet this year's heavy refinancing schedule.

The country paid almost a full percentage point less to sell 10-year bonds than it had just one month ago, despite continued concern among international investors about its public finances.

Italy, the world's fourth biggest debtor, needs to repay or roll over some €90 billion of bonds falling due between February and April.It raised €7.5 billion today, near the top of its planned range, with sharply lower yields for five and 10-year paper suggesting a recent rally in shorter-term debt driven by cheap European Central Bank funding is beginning to spur demand for longer maturities.

Analysts say the promise of more ultra-cheap loans to banks at a new three-year ECB tender in February should sustain domestic demand for Italian debt and keep driving short-dated bond yields lower.

Italy's 10-year yields fell 90 basis points to 6.08 per cent at the sale, which came after Fitch Ratings cut the country's debt rating by two notches late on Friday to 'A-' as it also downgraded four other members of the single currency bloc.

Demand for the 10-year benchmark totalled 1.4 times the offered amount, above last year's average bid-to-cover ratio. The sale of a new five-year bond saw weaker demand but sharply lower yields. At 5.4 per cent, the five-year auction yield was well below a euro lifetime high of 6.5 per cent Italy paid in mid-December.

With around €36 billion in bond redemptions and coupon payments due on the auction's settlement date, analysts looked at the sale with interest to gauge the flow of reinvestments Rome would manage to attract.

Analysts believe domestic buyers have played the lion's share in the latest rally in Italian bonds, while they say international investors remain more cautious in the absence of a lasting solution to the euro zone debt crisis.

After coming dangerously close to financial disaster in November, Italy has been striving to regain market confidence under the leadership of new prime minister Mario Monti.

A respected technocrat, Mr Monti has engaged the country in a broad-ranging reform effort while also pressuring European partners for a stronger response to the debt crisis.But Italy's position remains fragile with no permanent solution to the crisis in sight while an expected recession in the economy threatens to undermine the government's deficit cutting push.

Reuters