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Italy’s one-year debt costs fall sharply at auction

LONDON - Italy’s one-year borrowing costs fell by more than a percentage point from a month ago, to 2.697 percent at auction on Thursday, as large redemptions and lower rates on overnight deposits at the ECB supported demand for short-term paper.

In mid-June Italy paid 3.97 percent to sell one-year bills, its highest cost of funds since December, at an auction that came ahead of crucial elections in Greece and soon after a deal to help Spanish banks that did not fully reassure investors.

Progress on Spain’s bank bailout and a deal by EU leaders to allow euro zone rescue funds more flexibility to buy bonds have helped bring down Italian yields from a month ago, although analysts say uncertainty remains high and markets volatile.

“Yields are falling and that’s a good sign,” said Biagio Lapolla, a strategist at RBS.

“Zero rates on overnight deposits with the ECB, which came into force yesterday, surely helped. Investors are hunting for good short-term returns, also among ‘peripheral’ issuers.”

The Treasury will return to the market on Friday with a more challenging sale of up to 5.25 billion euros in new three-year bonds and three longer-dated issues that are no longer sold on a regular basis.

Analysts expect domestic demand to help the Treasury clear the sale. The decision to cancel its mid-August bond auction, in line with a practice followed in recent years, should also support demand.

The European Central Bank cut its benchmark interest rate to a record low 0.75 percent last week. It also slashed to zero the rate it pays on cash parked at the central bank overnight as it tries to encourage banks to restart lending to each other.

Following a sketchy accord a month ago, Madrid clinched a deal with euro zone partners on Monday to use the bloc’s emergency fund to recapitalise its banks. It also announced new austerity measures in return for softer fiscal targets.

Details of the Spanish bank deal have eased pressure on Spanish bond yields, also boosting sentiment towards Italian debt in thin secondary markets.

Italy’s 10-year yield stood at 5.8 percent on Thursday. A month ago it was well above 6 percent as extreme uncertainty about Greece’s future in the euro zone and about Spanish banks and public finances weighed on periphery debt.

On Thursday, Italy sold the planned 7.5 billion euros in bills, with bids totalling 1.55 times that amount, marginally down from a month ago.

The Treasury offered less in new bills than the 10.425 billion euros maturing mid-July, helping the sale. It said it was not issuing three-month bills due to the absence of specific cash requirements.