Italy paid markedly lower rates than a month ago at a sale of one-year treasury bills today as support from the European Central Bank for Italian and Spanish bonds eased pressure on governments' funding costs.
The yield on the €6.5 billion of 12-month BOT bills fell 71 basis points from a near three-year high of 3.67 per cent hit in mid-July, when fears Italy was being dragged into the euro zone debt crisis prompted investors to dump its stocks and bonds.
At 2.959 per cent, the 12-month auction yield was still above the 2.147 per cent it cost Italy to borrow in a sale in the middle of June.
In the first Italian auction since the European Central Bank began purchasing Italian and Spanish bonds this week, demand was almost twice the amount on offer, with the bid-to-cover ratio at 1.95 from 1.55 in the middle of July.
Although Italy has continued to witness relatively steady demand for its debt at auctions, rising rates on the country's €1.6 trillion outstanding bonds have fed concerns debt costs could push towards levels around 7 percent that are regarded as unsustainable.
At 120 per cent of gross domestic product, Italy's debt pile is second only to Greece's in the single currency area.
In a bid to ringfence the euro zone third-and fourth-largest economies from the spreading crisis, the ECB began buying Italian and Spanish bonds on Monday.
Traders said it was purchasing Italian bonds for a third day today, pushing the 10-year yield to 5.14 per cent compared with a 14-year high of around 6.4 per cent on Friday - when it overtook the equivalent Spanish rate for the first time in 15 months.
The premium investors charge to hold 10-year Italian bonds rather than safer German equivalents stood at 281 basis points after widening to above 400 basis points last week.
In return for support from the ECB, Italy has agreed to bring forward by a year to 2013 its deadline for balancing its budget. It has also pledged to implement further economic and labour reforms to boost its ailing growth.
Analysts have expressed reservations over the plans due to a lack of detail on what measures will actually be taken and potential difficulties in pushing them through.
Rome is next due to tap markets on August 26th with a new short-term sale while an auction of longer-term paper is scheduled for August 30th. The Treasury has cancelled its mid-August long-term bond sale citing limited borrowing requirements.
Italy has raised €277 billion in funding so far this year, or 65 per cent of its full-year target, the Treasury said, pointing to further issues of €147 billion.
Reuters