Policy action hopes drive Italy yields lower at auction

MILAN (Reuters) - Italy's 10-year funding costs fell below 6 percent for the first time since April at an auction on Monday as hopes for a stronger crisis response from policymakers spurred demand for the debt of vulnerable euro zone members.

Spanish and Italian yields retreated from peaks hit early last week after European Central Bank President Mario Draghi on Thursday said he would do whatever was necessary to defend the euro, including tackling high government funding costs.

Similar expressions of commitment to the single currency by the leaders of Germany, France and Italy have reinforced expectations for steps to support Italian and Spanish bond markets.

The ECB meets on Thursday but the timing and nature of any further action is uncertain. Germany is opposed to a resumption of the ECB's secondary market bond-buying programme and euro zone officials have said September is shaping up to be a "make-or-break" month for the crisis.

Italy sold 5.48 billion euros in bonds, near the top of its planned issue range, meeting demand for 1.4 times that amount.

Benchmark 10-year borrowing costs fell to 5.96 percent from 6.19 percent at a similar auction a month ago.

"On balance, not an unreasonable set of results," said Richard McGuire a rate strategist at Rabobank in London.

"Despite the welcome dip in yields, though, Italy's cost of borrowing remains decidedly elevated. ... Overall, then, while these sales do provide some indication of an easing of tensions at the periphery, they also show considerable further progress on this front is needed."

Five-year borrowing costs eased to 5.29 percent from 5.84 percent at an auction held during a period of uncertainty before a European Union summit at the end of June.

Both five- and 10-year auction yields hit their lowest level since April.

Italy also sold 750 million euros of a November 2015 bond no longer issued on a regular basis.

Last Tuesday Italy's 10-year yields hit their highest since January at 6.6 percent as investors fretted about the cost of a potential sovereign bailout for Spain and the impact this could have on Italy and on the future of the single currency.

Analysts say that any disappointment following the ECB meeting on Thursday would trigger a new bout of bond selling.

"I think markets have enough confidence in the ECB to give it a few days. If nothing were to happen, though, yields would start rising again," said ING strategist Alessandro Giansanti.

Burdened with a 2 trillion euro debt and in the grip of recession, Italy has seen its debt costs track Spain's higher as Madrid struggles to retain market access amid budget troubles.

Should Madrid seek further aid after a bank bailout of up to 100 billion euros, investors' attention would turn to Italy, whose economy is twice that of Spain's and whose funding needs are much larger, totaling 450 billion euros this year.

With Monday's sale the Treasury has met around 64 percent of its annual goal.

A broad domestic investor base has helped Italy cope with shrinking foreign demand for its debt.

Large coupon payments and the Treasury's decision to cancel a mid-August bond sale due to thin liquidity during the summer season likely supported demand at Monday's sale.

(Reporting by Valentina Za; Editing by Anna Willard)

Source: http://news.yahoo.com/policy-action-hopes-drive-italy-yields-lower-auction-110124248--sector.html

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