Italy's cost of borrowing for one-year funds declined sharply at a debt auction on Thursday, indicating that investor sentiment improved after the latest EU summit and the announcement of Spain's new austerity package.
The Italian Treasury raised the targeted EUR 7.5 billion from the sale of its 12-month bills or BoTs. The auction attracted bids totaling EUR 11.595 billion.
The yield on the one-year paper fell significantly to 2.697 percent from 3.972 percent in the previous sale on June 13.
Meanwhile, the bid-to-cover ratio, which reflects demand, dropped to 1.55 from 1.73.
While the Italian Prime Minister Mario Monti has indicated that his country may need to tap the euro area rescue fund, Austrian Finance Minister Maria Fekter reportedly said today that Italy is not likely to seek an EU bailout.
Yesterday, Spain unveiled a EUR 65 billion austerity package in its latest attempt to achieve the deficit targets amid a severe recession. At the start of the week, EU postponed Spain's deadline for meeting the target by an year.
The latest measures announced by the Spanish Prime Minister Mariano Rajoy include a hike in the VAT rate to 21 percent from 18 percent, reduction in jobless benefit claims, and salary cuts for government employees.
Last week, the Italian government late Thursday approved 4.5 billion euros in spending cuts for this year, with an aim to reduce the size of the public sector and to delay an increase in sales tax until the first half of 2013.
Spanish and Italian long-term borrowing costs have surged over the recent months. The yield on the Spanish 10-year bonds fell to 6.53 percent today after exceeding 7 percent in recent days, which is regarded as unsustainable.
As investors looked for more safe havens, yields on German and U.S. 10-year debt fell to record lows at auctions on Wednesday.
At the start of the week, the yield on the shorter-dated German and French debt turned negative. While, the yield on Germany's 6-month treasury bill fell to a record low, French debt fetched negative yield for the first time.
Elsewhere today, the U.K. saw its 10-year gilt yield fall to a record low in an auction. The Debt Management Office sold GBP 3.5 billion of the 1.75 percent 2022 September Gilt at 1.719 percent. Investors bid 2.2 times the amount offered.
Italy is set to face a tougher challenge on Friday when it auctions EUR 2.5 billion to EUR 3.5 billion of the new 4.50 percent July 2015 bond, and EUR 1 billion to EUR 1.75 billion of three off-the-run securities due 2019, 2022 and 2023.
by RTT Staff Writer
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