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Italy Sells Three-Year Bonds at Lowest Since Oct. 2010

Italy sold 6 billion euros ($7.8 billion) of bonds today, with borrowing costs on its three-year debt falling to the lowest since October 2010 as unlimited European Central Bank loans helped boost demand.

The Treasury sold 5 billion euros of a new three-year bond to yield 2.76 percent, down from 3.41 percent at the last sale of similar maturity debt on Feb. 14. Demand was 1.56 times the amount sold, compared with 1.40 times last month. The Rome-based Treasury also sold 1 billion euros of seven-year bonds at 4.3 percent, meeting the 6 billion-euro maximum set for the sale.

The ECB has loaned banks more than 1 trillion euros in two auctions since December to avert a credit crunch, propping up demand for government debt. Italy 10-year borrowing costs have fallen by more than 2 percentage points since Prime Minister Mario Monti took over in November and began an overhaul of the Italian economy that aims to balance the budget next year and lay the groundwork for economic growth.

“Today’s auction was well absorbed, confirming the recent appetite for the Italian debt,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in an e-mailed note to investors. The government reforms and the ECB lending “are helping the solid performance of the Italian debt that, in cross country spreads terms versus the periphery, currently trades at pre-crisis levels.”

The yield on Italy’s benchmark three-year bond fell three basis points to 2.65 at 1:20 p.m. in Rome. The yield on Italy’s 10-year bond fell 6 basis points at 4.84 percent, down from a euro-era high of 7.26 percent on Nov. 25.

“‘The auction went very well, and this trend of stabilization in our sovereign bonds is continuing,” Deputy Finance Minister Vittorio Grilli told reporters today in Milan.

Today’s auction came after the Treasury sold 8.5 billion euros of one-year bills yesterday at the lowest rate since August 2010.

Concern that Italy would be engulfed by fallout from the region’s debt crisis have eased on a combination of Monti’s reforms, the ECB’s three-year lending program and Europe approving a second bailout for Greece.

Italy’s improving finances means the Treasury may sell less debt than originally forecast. Total issuance this year may be closer to 440 billion euros, rather than the 450 billion euros predicted at the start of the year as the Treasury cuts back some planned bill auctions, Maria Cannata, the director of public debt, said today in Milan.

Bonds have more room for gains and the difference between the yield on Italy’s benchmark 10-year bond and comparable German debt could fall at least another 100 basis points, Cannata said. That would put the spread back to around the 180 basis-point level of June of last year before concern about debt crisis contagion send Italy’s yields soaring, she said.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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