Italy's 10-yr debt costs climb towards 6 percent at key sale

Fri Apr 27, 2012 11:14am EDT
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By Valentina Za

MILAN (Reuters) - Italy's borrowing costs rose to 5.84 percent at a benchmark 10-year bond auction on Friday, their highest level since January, after a credit ratings cut for Spain overnight added to markets' concerns about the debt of weaker euro zone countries.

The two-notch downgrade by rating agency Standard & Poor's weighed on euro zone bond markets ahead of the Italian sale, further increasing the cost the Treasury had to shoulder to sell 5.95 billion euros in bonds.

Investors are wary of the challenge Italy faces in trying to reduce its debt burden while hauling its economy out of recession.

In a reassuring sign for the markets, the amount sold was close to the maximum 6.25 billion euros Italy had indicated it hoped to raise, although the yields the Treasury had to accept underscored the fragility of investor confidence.

"These acceptable results certainly came at a price which, in turn, leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable," said Richard McGuire, a strategist at Rabobank in London.

Analysts said the Treasury had set a lower minimum size than usual, widening the range of what it would potentially raise at the sale, to hedge against risks of weak demand in the face of highly volatile euro zone bond markets.

Italy sold new tranches of its May 2017 and September 2022 bonds. It also sold two lines maturing in April 2016 and February 2019 which it no longer issues on a regular basis.

The 10-year auction yield rose 60 basis points from the last sale a month ago, approaching the sensitive 6 percent threshold. A sustained break of 6 percent in 10-year yields could see borrowing costs accelerate to unaffordable levels which drove Greece, Ireland and Portugal to seek international bailouts.   Continued...