Italian Borrowing Costs Fall on Rate Cut Expectations

Italy’s borrowing costs dropped at an auction today as investors pushed market yields to record lows on speculation that the European Central Bank may cut interest rates and the country will soon have a government.

The Rome-based Treasury sold 2.5 billion euros ($3.25 billion) of zero-coupon bonds at a record-low 1.167 percent, down from 1.746 percent at the previous auction on March 25. Investors bid for 1.66 times the amount offered, compared with 1.43 times last month. The Treasury also sold 750 million euros of inflation-linked bonds due 2023 at 2.65 percent, down from 3.230 percent on March 25.

“In the current environment of expansionary monetary policy, we continue to favor roll-down strategies, we prefer selling the three-month area and buying 2014 to 2015 bonds,” Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan, wrote in an e-mailed note.

Euro-area services and factory output shrank for a 15th month in April, according to Markit Economics, increasing expectations the ECB will cut interest rates to boost the economy. ECB executive board member Joerg Asmussen said April 20 that the bank may cut borrowing costs if data show a need for it.

Italy’s 10-year bond yield dropped below 4 percent on April 22 for the first time since November 2010. Ten-year yields today were little changed at 3.95 percent.

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