Italy's borrowing costs dropped sharply as it sold the maximum amount of 5 billion euros at an auction of short-term debt on Thursday, January 26 helping drive down yields on its longer-dated bonds ahead of a crucial sale of five- and 10-year paper on Monday, Reuters reported.
At the first auction since credit rating agency Standard & Poor's downgraded Italy by two notches, yields on its two-year zero-coupon bonds fell to 3.76 percent – the lowest since August and more than a percentage point less than it paid a month ago.
"The Treasury managed to sell at the top of the range and at a lower yield," said Sergio Capaldi, an analyst at Intesa Sanpaolo in Milan. "We are returning to (yield levels seen) last summer but we still have a long way to go before the situation normalizes. A year ago yields were below 3 percent."
Italian government bond yields and the cost of insuring its debt against default fell after the auction, with the yield on its benchmark 10-year bond 15 basis points lower on the day at 6.09 percent. The cost of a five-year credit default swap fell 29 bps to 410 bps, according to prices from Markit.
S&P cut Italy's rating to BBB+ with a negative outlook on January 13, citing rising external financing risks.
Italian bond yields have nevertheless fallen from euro-era highs hit in November as cheap European Central Bank loans have fuelled appetite for its short-term debt among domestic banks. But longer-dated bonds have rallied less, and Monday's sale of up to 8 billion euros is considered an important test of demand for Italian paper among international investors whose support it will need to meet this year's huge borrowing target.
