Italy Borrowing Costs Drop at Sale as Political Risk Ignored

Italian borrowing costs dropped at an auction of one-year bills from the previous sale as investors shrug off political risk in the country.

The Rome-based Treasury sold 7.5 billion euros ($10 billion) of 365-day bills at 1.053 percent, down from 1.078 percent at the previous auction July 10. Investors bid for 1.49 times the amount offered, down from 1.56 last month.

The July sale came after Standard & Poor’s cut the country’s credit rating on concern the economy will struggle to recover. Last month the Treasury cancelled a bond auction planned for tomorrow citing a surplus of cash.

Italy’s 10-year bond yield was little changed at 4.2 percent after the sale at 11:10 a.m. in Rome, leaving the difference with comparable German bunds at 248 basis points.

Ex-Premier Silvio Berlusconi’s PDL party threatened a mass resignation of parliamentary deputies following his Aug. 1 tax-fraud conviction that carries a five-year ban from public office. He later backed off, saying the government should “continue its work.”

Political concerns haven’t spilled over into Italy’s bond market, partly because peripheral bonds continue to be supported by the European Central Bank’s indication that rates will stay low.

“The ECB message at the August meeting, that the recent increase in money market rates was unwarranted, as well as expectations for another LTRO are likely to keep money market rates at subdued levels in the future,” UniCredit analyst Chiara Cremonesi wrote today in a note. “The environment should thus remain favorable for BOTs.”

“I hope Italian politicians don’t forget about the importance” of the spread, Prime Minister Letta said at a press conference in Rome Aug. 9.

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