Italian borrowing costs are set to increase further at an auction on Thursday, the first long-term sale since Standard & Poor's cut the country's credit ratings, with the 10-year yield seen rising to a new euro lifetime high of around 5.9 percent.
The Treasury plans to sell between 5.5 billion and 9 billion euros in three-, five- and ten-year debt, and it has carefully tailored its offer to help attract sufficient demand.
The euro zone's third largest economy, saddled with a public debt pile of 1.9 trillion euros, has been fighting to stave off a market crisis that has driven its bond yields towards levels seen as unsustainable over the long-term.
Market pressure has eased somewhat over the last few days, as investors held onto hopes that the euro zone's bailout fund could be expanded.
But at 368 basis points the spread between 10-year Italian BTPs and German Bunds is not far from the record high of 416 basis points it hit at the height of the crisis, and Italy is benefitting less than Spain from the relative market respite.
Rome paid the most in three years at a short-term auction on Tuesday.
"Italy pays a heavier toll because of its more fragile political situation compared with Spain," said ING strategist Alessandro Giansanti," referring to weeks of government flip-flopping over a 60-billion euro austerity package approved in parliament this month.
Political uncertainty and weak growth prospects were the main reasons cited by Standard and Poor's when it downgraded Italy by one-notch on Sept. 20.
To ease pressure on the 10-year segment, Italy is splitting its issuance between a March 2022 BTP and an old August 2021 BTP, which traders say is sought after on the market.
The 2022 bond was first launched in August at a poorly received auction where its yield nonetheless fell to 5.22 percent thanks to support from the European Central Bank, which has been buying Italian bonds to keep a lid on yields.
At the market close on Wednesday, it was yielding 5.93 percent.
Analysts at Intesa SanPaolo noted Thursday's sale would be settled in October, when they expected overall Italian gross issuance to surpass maturing debt by about 20 billion euros.
Debt coming due frees up liquidity for reinvestments.
Helped by a more favourable climate, the sale is generally expected not fall short of its minimum target, analysts said.
Italy is also selling a three-year BTP and a floating-rate CCTeu bond.
($1 = 0.733 Euros)
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