MILAN: Italy’s three-year borrowing costs are set to fall below 4 percent at a bond auction on Tuesday as cheap ECB loans continue to support demand for the country's paper, easing its interest burden as it refinances tens of billions of euros of debt.
Rome will contribute to a heavy schedule of euro zone supply this week by offering up to 6 billion euros of bonds, including its Nov. 2014 three-year benchmark and two off-the-run issues due in Nov. 2015 and Feb. 2017.
Demand for government paper that can be used to borrow cheaply from the European Central Bank has driven Italian short-term yields sharply lower after the central bank injected half a trillion euros of three-year funds in late December.
Traders warn that yields may not have much further to fall from current levels, but they say demand is still robust ahead of a second such tender on Feb. 29 at which banks are expected to grab another 500 billion euros of ultra-cheap loans.
"The three-year segment on the Italian curve is still attracting good demand from investors," said ING strategist Alessandro Giansanti.
Italy has stepped up its issuance of short-term debt to take advantage of the surge in demand for these less risky maturities as it strives to refinance some 90 billion euros of bonds expiring between February and April. It has already sold nearly 30 billion euros of bonds at auctions settled in 2012.
Italy's Nov. 2014 BTP bond yielded around 3.5 percent on Monday, pointing to a significant drop in three-year funding costs. Italy last sold the bond at an average 4.8 percent rate in mid-January.
Analysts said the three-year benchmark was still attractive compared to bonds of similar maturity on the Italian curve but warned the Treasury may cut the sale below the maximum planned amount of 4 billion euros, a significant size for a single bond.
"The last time Italy issued more than 4 billion euros of a three-year bond was in March last year," Giansanti said.
On Monday, Italian bonds rose on the secondary market after Greece's parliament approved at the weekend austerity measures needed to secure a new international bailout and avert a chaotic default next month when bond redemptions fall due.
But they gave up most of their gains later in the session, amid thin volumes, as concerns prevailed about Athens' ability to deliver on the tough measures.
Italy's one-year borrowing costs fell again at auction on Monday despite weak demand, which left the auction only just covered.
The Bank of Italy said the unusually low demand for one-year bills might have been due a to a technical glitch delaying some bids until after the submission deadline.. If that proves not to be the case, Monday's auction results could add to evidence showing demand is becoming strained, analysts said, also noting a widening gap between the average and highest interest rates paid on the bills.
The costs of refinancing Italy's 1.9 trillion euro debt pile started rising in the second half of 2011 and reached a peak in November before tumbling after the ECB's three-year tender.
Spanish short-term borrowing costs are also expected to edge down on Tuesday, when Madrid offers 5.5 billion euros of 12- and 18-month bills ahead of a three-year bond sale on Thursday.
Greece will also sell three-month bills on Tuesday, while Belgium will offer three- and 12-month paper.
Italy will also face competition on Tuesday from the Netherlands, one of the euro zone's top-rated countries, which will issue up to 4 billion euros of five-year bonds.
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