Italy Borrowing Costs Rise at Auction Before Vote Outcome

Italy’s borrowing costs rose at an auction of zero-coupon bonds today as investors await the outcome of an election that may produce a fragmented parliament.

The Rome-based Treasury sold 2.82 billion euros ($3.73 billion) of two-year zero-coupon bonds, near the 3 billion-euro maximum target, to yield 1.682 percent, up from 1.434 percent at the last auction of the same securities on Jan. 28. Investors bid for 1.65 times the amount offered, compared with 1.45 last month.

Final polls published before a ban kicked in Feb. 9 showed Democratic Party leader Pier Luigi Bersani’s lead over media-magnate and former premier Silvio Berlusconi had narrowed to about 6 percentage points. While Bersani’s center-left bloc is expected to win a majority in the Chamber of Deputies, he may fall short of seats in the Senate and may be forced to seek an alliance with Prime Minister Mario Monti.

Berlusconi’s gains in the polls have added uncertainty to the country’s elections and rattled investors, pushing the yield on Italy’s benchmark 10-year bond up by 32 basis points from a two-year low of 4.124 percent on Jan. 25. Investors are concerned that a new unstable government might not be able to carry on the reforms of outgoing premier Monti, who faced a euro-era record yield of 7.261 percent when he took office in November 2011.

Italy also sold 941 million euros of 2.1 percent inflation-linked 2021 bonds and 309 million euros of 3.1 percent inflation-linked bonds due in 2026. The 2021 bond was priced to yield 2.79 percent while the 2026 bond was sold at a yield of 3.23 percent.

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