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Italy finds lukewarm demand for long-term bonds

Wednesday - 11/14/2012, 9:37am  ET

MILAN (AP) -- Italy enjoyed mixed results when it raised nearly EUR5 billion ($6.36 billion) from the bond markets in its first sale of very longer-term debt since May 2011.

The Treasury sold EUR682,500 in 30-year bonds at an interest rate of 5.33 percent. Bids were shy of the EUR1.5 billion maximum on offer.

A 15-year bond sale also fell short, netting EUR816,000 at a yield of 4.81 percent -- missing the EUR1.5 billion maximum.

However, Italy easily raised EUR3.5 billion in a sale of 3-year bonds with yields at 2.64 percent, down from 2.86 percent last month.

IHS Global Insight analyst Raj Badiani called the yields and the level of demand "tolerable rather than reassuring."

Italy has seen its borrowing costs fall since the European Central Bank unveiled its offer to buy short-term bonds in struggling countries. The country has nearly met its funding needs for the year, which Badiani said "is a notable achievement given that Italy was under acute financial and political pressures in the second half of 2011."

He noted, however, that Italy's borrowing rates could rise again in the first half of 2013 as Italians vote to replace the current technocratic government with party politics. The markets, he said, will be looking for more liberalization once the election is over.

"The risk is that the relatively unified approach to recent fiscal austerity and reform fails to survive the April 2013 general election," Badiani said.

In contrast, German debt has become a safe haven investment for traders looking to protect their money from market risk rather than seeking out returns. On Wednesday, investors effectively paid the German government for the privilege of parking their funds in the state coffers of Europe's biggest economy.

Germany sold EUR4.2 billion in 2-year debt with a zero coupon, with demand twice the amount on offer, at an average interest rate, or yield, of minus 0.02 percent.

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