Italian Borrowing Costs Drop Sharply In Bond Sale

Published January 26, 2012 2:27PM (EST)

MILAN (AP) — Italy easily raised euro5 billion ($6.47 billion) in a pair of bond auctions on Thursday that saw a sharp drop in borrowing rates, a sign that investor confidence in the country is improving.

The sale was the first test of market sentiment in the country's handling of its debt since ratings agency Standard & Poor's cut Italy's credit rating by two notches on Jan. 13.

Italy paid an interest rate of 3.763 percent on euro4.5 billion in two-year bonds, compared with 4.85 percent in a comparable auction in December. The borrowing cost for a new bond expiring in September 2014 was 3.2 percent.

UniCredit analysts said the sale was "positive" and an encouraging sign for upcoming auctions.

Nicholas Spiro, who heads a sovereign debt consultancy in London, noted the market was "particularly buoyant" after the U.S. Federal Reserve pledged to keep interest rates low until late 2014 to nurture the country's stubbornly slow economic recovery.

That will have encouraged traders to invest in riskier assets, such as bonds from economically weaker countries like Italy.

Italy has seen its borrowing costs ease in recent weeks, after yields on benchmark 10-year bonds pushed to the perilous 7 percent level last year. Following Thursday's auction, 10-year bonds were trading at 6.04 percent on the secondary market, where bonds are traded after they are sold.

The government has been trying to regain investor confidence by cutting public spending and reforming a sluggish economy.

Premier Mario Monti recently passed a euro30 billion austerity package and announced liberalization measures.

His government easily survived a confidence vote in the lower house of Parliament, by a margin of 469-74, on a series of additional measures that include an increase in tax on cigarettes and funds for Italians who have been exiled from Libya. A separate vote on the additional measures is expected by Tuesday.

Italy goes back to the bond markets on Friday, selling up to euro8 billion in six-month bonds and euro3 billion of bonds expiring in 11 months.

On Monday, Italy will try to raise another euro8 billion in the sale of longer term paper.

By Salon Staff

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