MILAN: Italy's one-year borrowing costs dropped to their lowest since March on Wednesday, a more than one percent drop since a month ago showing how the European Central Bank's pledge to enter bond markets has made Rome's debt a safer bet for investors.
A ruling by Germany's top court backing the euro zone's new rescue fund and allowing the ECB to act should it be asked by a government added to positive market sentiment and drove Italy's cost of borrowing another few basis points lower in the hour before the auction.
But the drop in 12-month yields to 1.69 percent on Wednesday from 2.77 percent a month ago and almost 4 percent in mid-June showed the extent to which ECB President Mario Draghi's bond-buying plan has changed the game for his homeland.
"The short end of the curve for Italy has become competitive, now the fall in yields needs to spread to longer maturities - from five years onwards and particularly in the 10-30 year segment," said ING bond strategist Alessandro Giansanti.
Ten-year Italian yields fell 6.6 bps to 5.03 percent immediately after the German ruling. Two-year yields also dipped.
The German court verdict, which landed around 45 minutes before the Italian sale's cut-off time at 0900 GMT, had been largely priced in, with the auction yield on the one-year bills coming in just above the lowest levels seen on the grey market.
The Treasury sold 9 billion euros of one-year bills and 3 billion euros of three-month bills at the auction, as planned. The bid-to-cover ratio for the one-year bills was 1.65, slightly down from 1.69 in mid-August.
Rome faces a tougher task on Thursday when it will sell up to 6.5 billion euros of three-year, 15-year and off-the-run bonds, although market tensions have eased since the European Central Bank last week announced plans to buy bonds issued by the region's weakest states.
Short-dated paper has benefited more from the market rally as the ECB will target bonds with maturities of up to three years.
The German verdict removed a potential obstacle to the bond-buying plan. One major concern for investors remains Italy's painful recession, which makes it hard for the country to reduce its huge debt pile, now at 123 percent of gross domestic product.
Underscoring these worries, data on Wednesday showed Italian industrial output fell a seasonally adjusted 0.2 percent in July, a smaller decline than analysts had expected but still offering little sign of a recovery.
Also on investors' radar on Wednesday are European Commission President Jose Manuel Barroso's proposals for a "banking union" to help end the euro zone's economic and financial turmoil, and Dutch elections.
Polls for the vote show the country's two main pro-European parties are tied. While a coalition is likely, questions remain over how quickly a new government can be formed.
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