Italy 10-year borrowing costs at seven-month low

Italy's 10-year borrowing costs fell to 5.24 percent, the lowest since August 2011, in an auction on Thursday that continued a trend of easing tensions in the euro zone, at least for now. Demand from Italian banks helped Rome raise 8 billion euros in 10- and five-year bonds - at the upper end of the treasury's target range.
In the secondary market, profit taking kicked in, however. The risk premium for 10-year Italian bonds over German Bunds rose to the highest level in a month after the sale. Rome's third and most challenging debt sale this week came after a solid bill auction on Wednesday and a smaller offering of zero-coupon and inflation-tied bonds on Tuesday.
But political tensions have the potential to reverse the trend of positive bond auctions in Italy. After weeks of relative calm, there is growing opposition from unions and centre-left politicians to Prime Minister Mario Monti's plans to reform labour laws to ease hiring and firing. "Despite the good auction, Italian BTPs seem to be under pressure today," said Annalisa Piazza, a market economist at Newedge Strategy in London.
"Volatility might be explained by uncertainties surrounding the complicated development of the labour market reforms. However, we suspect part of the movement is also due to some profit taking." Italy paid 5.24 percent to sell the 10-year bond. It was the lowest yield since last August for this maturity and it marked a further improvement from a level of 5.5 percent a month ago. Five-year borrowing costs stabilised at their lowest level since May 2011 at 4.18 percent - broadly unchanged from an auction one month ago. The bid-to-cover for both sales rose to around 1.65 from 1.4 a month ago.
After rallying this year following the injection of long-term funds by the European Central Bank, Italian bonds have fallen victim to some profit-taking in recent weeks. "The market situation remains challenging," said Intesa Sanpaolo strategist Chiara Manenti. "Economic data are bound to become the key factor and expectations are not positive in this respect for Italy and Spain." With the impact from the ECB liquidity provision expected to gradually wane, markets will focus more on economic fundamentals. Industry Minister Corrado Passera said on Thursday Italy's economic recession would last for the whole year.