Italy Borrowing Costs Rise at Auction on Crisis Concerns

Italy’s Borrowing Costs Rise
The national flag of Italy flies from a flagpole at St. Angel Castle in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Italy’s borrowing costs jumped at the sale of 8.5 billion euros ($11.3 billion) of six-month bills as renewed concern about the spread of the region’s debt crisis forced the Treasury to offer higher rates to attract investors.

The Treasury sold the debt at a rate of 1.772 percent, up from 1.119 percent at the previous auction on March 28. Investors bid for 1.71 times the amount offered, up from 1.51 times last month. The Treasury sold the maximum 8.5 billion euros planned for the sale before a sale of bonds tomorrow.

“The solid demand bodes well for tomorrow’s auction,” Gianluca Ziglio, an interest-rate strategist at UBS in London, said by phone.

Italian bonds pared gains after the sale and the yield on the benchmark 10-year bond rose 5 basis points to 5.69 percent at 11:35 in Rome, pushing the difference with German bunds to 398 basis points. “We are probably seeing some profit-taking” Ziglio said.

Italian bonds may gain this week after declining for the previous six weeks after the Spanish government fueled new concern about the debt of so-called peripheral nations when it announced on March 2 it wouldn’t meet its deficit target this year. Italian Prime Minister Mario Monti last week pushed back the government’s goal to balance the budget by one year to 2014.

Spanish Sale

Spain sold 1.9 billion euros of bills on April 24, missing the maximum target even after reducing the goal for the sale, and its borrowing costs almost doubled from the previous tender. Italy will test markets again tomorrow, when the Treasury seeks to sell as much as 6.25 billion euros of bonds, including 5- and 10-year debt.

Demand for Italian debt has been underpinned by domestic banks as foreign investors scale back their bets on Europe. Deputy Finance Minister Vittorio Grilli is meeting with officials from The China Investment Corp. today to try to convince them to buy Italian debt, newspaper Il Sole-24 Ore reported today.

Political uncertainty in Europe is also adding to concerns that the euro zone debt crisis is far from over. This week Dutch Prime Minister Mark Rutte offered to quit after lawmakers split over austerity. French president Nicolas Sarkozy lost the first round of his re-election bid and trails in opinion polls going into the second round of the vote, raising concern about the future of French-German cooperation to fight the crisis.

“The outcome of France’s presidential election could be the trigger for renewed selling pressure if it leads to serious disagreements between Paris and Berlin over how to manage and contain the euro-zone crisis,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note.

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