LONDON: Italian yields edged up on Wednesday as investors made room on their books for a sale of up to 7.25 billion euros of the country's bonds -- the first auction since Fitch cut its credit ratings last week.
A good auction result may offer some short-term support for Italian bonds, but analysts expect the political uncertainty triggered by last month's inconclusive election -- the reason for Fitch's move -- to keep the debt market volatile.
Debt costs are expected to rise at the auction to match recent moves in secondary market prices. But demand for high-yielding assets and the perceived protection offered by the European Central Bank's untested pledge to buy highly indebted countries' bonds are expected to ensure sufficient demand.
Italian 10-year yields were 3 basis points higher at 4.63 percent, having traded in a roughly 4-5 percent range this year.
"I would imagine (the auction) will get away, but it's not the end. We're waiting for the next political news out of Italy as the next big market mover," one trader said.
Italy, whose rating was cut by one notch to BBB+, will offer up to 5.5 billion euros of bonds maturing in 2015 and 2028 and up to 1.75 billion euros of floating rate bonds linked to 6-month Euribor maturing in 2017 and 2018.
Despite the Italian uncertainty, the euro zone's lower-rated sovereigns appear to see a window of opportunity in which to issue debt as investors, reassured the ECB backstop will contain contagion from any flare-up in the debt crisis, seek yield.
Ireland said on Tuesday it plans to issue its first new benchmark 10-year bond since soaring yields forced it to take a bailout in 2010. An industry source said the books could be opened on Wednesday. Spain plans an extraordinary triple-bond auction on Thursday.
"As markets have now ruled out the possibility of a euro break-up, if you believe that the ECB will remain accommodative ... it means that carry trades remain favoured," BNP Paribas rate strategist Patrick Jacq said.
"Therefore it makes sense to invest in peripherals and it makes sense for peripherals to issue at the moment. Demand is there, liquidity is there, the grab for yields persists."
In a sign that the ECB's bond-buying programme has so far been effective in preventing contagion, Spanish 10-year yields have fallen to their lowest levels since March 2012 this week at 4.727 percent. On Wednesday, they were steady at 4.75 percent.
Irish benchmark yields were 4 basis points higher on the day at 3.73 percent. Its upcoming debt sale would take it one step closer to a successful end of its bailout programme. Ten-year yields topped 15 percent in mid-2011.
At the other end of the euro zone credit rating scale, German 10-year yields were flat at 1.48 percent, while Bund futures were 2 ticks higher at 143.06.
Germany sells two-year bonds later in the day.