Italy’s 10-Year Borrowing Costs Fall to 2 1/2-Year Low at Sale

Italy’s 10-year borrowing costs declined to a 2 1/2-year low at an auction today after new Prime Minister Enrico Letta was sworn in, ending a two-month political standoff caused by inconclusive elections.

The Rome-based Treasury sold 3 billion euros ($3.9 billion) of bonds maturing in May 2023 at 3.94 percent, down from 4.66 percent at a March 27 auction. That’s the lowest since October 2010. Investors bid for 1.42 times the amount offered, up from 1.33 last month. The Treasury also sold 3 billion euros of debt maturing in 2018 at 2.84 percent, down from 3.65 percent at the March 27 auction.

Letta, 46, of the majority Democratic Party, managed to form a government after forging an alliance with Silvio Berlusconi, resurrecting the coalition that stood behind the previous government of Mario Monti. While the deal gives Letta a majority in parliament, he will have to mediate between the competing agenda of his party and Berlusconi’s coalition which historically have been on opposite sides.

“For the time being, this is certainly to be preferred to the unclear situation beforehand,” Peter Schaffrik, head of European interest rate strategy for Royal Bank of Canada, wrote in a note to investors today. The appointment of Bank of Italy veteran Fabrizio Saccomanni as finance minister is “a very market friendly appointment as he is seen to be close to European Central Bank president Draghi.”

Yields are also being pushed lower by expectations that the ECB will cut interest rates as European economies show signs of slowdown. Germany’s Ifo index of business confidence fell more than forecast last week and euro-area gauges of manufacturing and services activity for April showed weakness in output.

Italy’s 10-year bond yield dropped below 4 percent on April 22 for the first time since November 2010 and was down 11 basis points to 3.95 percent after the sale at 11:18 a.m. in Rome.

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