Demand for Italian bonds suggests debt default fears diminishing

Strong demand for Italian government debt yesterday pushed the country’s borrowing costs lower and suggested investors have become less jittery about a possible default by the eurozone’s third-largest economy.

Italy raised €10.7 billion (£9bn) in two auctions at lower rates than those it was forced to pay just a month ago when investor concerns effectively prompted a change in government.

The sharp decline in Italy’s borrowing costs could be a signal that commercial banks from the 17 countries that use the euro diverted some of the money they tapped from emergency loans from the European Central Bank last week to buy the bonds of heavily indebted governments. It may also suggest rising investor confidence in Italy’s recent efforts to reduce its long-term debt through a variety of austerity measures.

The Bank of Italy said the average yield on its €9bn, six-month bill offering was 3.251 per cent, half the 6.504 per cent rate it had to pay last month. An auction of two-year bonds, which raised €1.7bn, also saw the yield fall to 4.853 per cent from 7.814 per cent last month.

Italy’s benchmark ten-year bond yield consolidated below the 7 per cent level widely considered to be unsustainable.

“This suggests that the Italian sovereign debt market has pulled back from the dangerous situation in late November,” said economist Raj Badiani at IHS Global Insight.