Italian Notes Gain as Borrowing Costs Fall at Bill Sale

Italy’s two-year notes rose for the first time in five days as the nation’s borrowing costs dropped to the lowest in almost three years at a sale of 8.5 billion euros ($11.4 billion) of debt due in six months.

Ten-year Italian yields also fell before a sale of as much as 6.5 billion euros of the debt and five-year notes tomorrow. Italy sold 4.75 percent bonds due in September 2028 on Jan. 16 through banks. Austria’s two-year notes rose as Standard & Poor’s lifted the outlook on the country’s credit rating. Financial institutions borrowed 124.1 billion euros for seven days in the European Central Bank’s main refinancing operation today, down from 125.3 billion euros last week.

“There is a positive stance from investors towards Italian debt,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “I expect tomorrow’s sale will go fine on the back of the successful 15-year auction this month.”

Italian two-year yields fell five basis points, or 0.05 percentage point, to 1.51 percent at 4:23 p.m. London time. The 6 percent note maturing November 2014 rose 0.08, or 80 euro cents per 1,000-euro face amount, to 107.87. Yields on similar-maturity Spanish debt fell six basis points to 2.48 percent.

The ECB’s pledge to buy bonds is providing an effective backstop even amid rising political concern before Italians go to the polls to elect their next premier on Feb. 24-25.

The Treasury in Rome today sold 181-day bills at 0.731 percent, the lowest since March 26, 2010 and down from 0.949 percent at the previous auction of similar-maturity debt Dec. 27. At today’s auction, investors bid for 1.65 times the amount of securities allotted, up from 1.57 times last month.

Austria Outlook

Standard & Poor’s raised its outlook on Austria’s credit rating to stable from negative, saying it sees the country sticking to debt-cutting plans and banks bolstering their weak capital basis.

The outlook for the Alpine republic’s AA+ rating was lifted as its economy is expected to remain resilient to the negative impact of Europe’s debt turmoil, S&P said in a statement today. Austria was stripped of its top rating a year ago.

Two-year Austrian yields fell three basis points to 0.30 percent. German two-year yields fell two basis points to 0.28 percent.

A total of 278 banks will return 137.2 billion euros tomorrow, the first opportunity for early repayment of the initial three-year loans under the credit-boosting Longer-Term Refinancing Operations, the Frankfurt-based ECB said last week. That’s more than the 84 billion euros economists predicted in a Bloomberg News survey.

‘Front-end Selloff’

“The front-end selloff had been quite aggressive,” said Mohit Kumar, head of Europe and U.K. rates strategy at Deutsche Bank AG in London, referring to shorter-dated maturities. “Before today’s move, it was pricing in about 500 billion euros of repayments from the LTRO and that seemed a bit aggressive.”

Volatility on Portuguese bonds was the highest in euro-area markets today, followed by those of the Netherlands and Belgium, according to measures of 10-year or similar-maturity debt, the yield spread between two- and 10-year securities, and credit-default swaps.

German securities have handed investors a gain of 1.9 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 2 percent.

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