LONDON Dec 29 Italy's borrowing costs fell to
two-week lows on Thursday before a final bond auction of the
year seen as a test of investor appetite for Italian debt as the
country grapples with a crisis in its banking sector.
The Italian government is scheduled to sell up to 6.75
billion euros of debt at an auction later in the day.
That sale takes place at a time of intense focus on Italy's
banking sector and the future of troubled lender Monte dei
Paschi, which has requested aid from a new 20 billion-euro
($20.9 billion) state fund to help lenders in distress.
Efforts to clean up the banks and a smooth transition to a
new prime minister, Paolo Gentiloni, have helped Italian bonds
recover from losses made in the run-up up to a Dec. 4
referendum, in which voters rejected proposed constitutional
reforms. Matteo Renzi quit as premier after that vote.
Still, there are concerns about the strength of the bailout
fund. Earlier this week, the European Central Bank told Monte
dei Paschi its capital shortfall had risen to 8.8 billion euros
from the 5 billion euros indicated previously, raising questions
about whether funds earmarked by the government would be enough
to cover the requirements of the sector.
The link between Italy's banks and bond market is a major
concern for investors. Banks, which hold large amounts of
government debt, have been hit by worries over their exposure to
bad loans built up during years of economic downturn.
"The auction should be a test of investors' appetite for
BTPs," Luca Cazzulani, a strategist at UniCredit, said in a
note. "Italian bonds were under pressure in November and the
spread versus Bunds, although down from recent peaks, is still
wide compared to the last two years average."
Italy's 10-year government bond yield fell 5 basis points to
1.79 percent, a two-week low.
Yields on safe-haven 10-year German bonds, which have
benefited this week from concerns about Italy's bank rescue
plan, fell to a fresh seven-week low of 0.17 percent
But with Italian bonds outperforming, the 10-year yield gap
over German peers narrowed to around 162 basis points. It had
widened to just above 190 bps ahead of the Dec.4 referendum.
(Reporting by Dhara Ranasinghe; Editing by Keith Weir)