Italy seen vaulting last hurdle on long-term bond sale

MILAN Thu Nov 29, 2012 7:52am GMT

Italian Prime Minister Mario Monti gestures as he speaks during the opening ceremony of the academic year at the Bocconi University in Milan November 15, 2012. REUTERS/Alessandro Garofalo

Italian Prime Minister Mario Monti gestures as he speaks during the opening ceremony of the academic year at the Bocconi University in Milan November 15, 2012.

Credit: Reuters/Alessandro Garofalo

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MILAN (Reuters) - Italy is expected to clear its last funding hurdle of 2012 on Thursday after a year when its heavy sovereign debt burden threatened repeatedly to push it into seeking a bailout.

The treasury is seeking to place up to 6 billion euros of five- and 10-year bonds at an auction that could bring Rome within reach of its 460-465 billion euros (£371-£374.7 billion) 2012 borrowing target.

The borrowing needs of the euro zone's third biggest economy are expected to be 10 percent lower in 2013. But uncertainly over the outcome of a general election in March will keep the treasury on guard in the first quarter of next year.

"The final part of the year looks smooth for funding," said Alessandro Giansanti, an analyst at ING. "If we think where we stood a year ago, one can see how much the yields have come down."

At an auction last November, shortly after technocrat Mario Monti took over from scandal-plagued premier Silvio Berlusconi, the treasury had to pay a record 7.56 percent to draw bids on its 10-year bonds.

A pledge by the European Central Bank to buy bonds with maturities of up to three years has sparked a rally in short-term bonds issued by southern euro zone states in the latter half of this year. But sales of 10-year paper remain the real test of how investors measure the risk of an Italian default.

"The fall of 10-year yields to the lowest level since May 2011 (4.60 percent) would be the confirmation the ECB has changed the perception of Italian risk in a stable way," said Elia Lattuga, fixed income strategist at Unicredit.

Lattuga expects the cost of funding to drop on Thursday by 40 basis points for the five-year bond, to around 3.40 percent, the lowest level since November 2010, and by 30 basis points for the 10-year paper.

Despite the ECB's bond-buying plan, Italy could struggle to woo foreign buyers spooked by the euro zone's relentless problems in bailing out Greece and trying to contain Spain's economic and banking troubles.

In less volatile markets, Italy could focus on lengthening the average life of its debt towards 7 years after a big refinancing hump forced it to offer shorter maturities in the first part of the year. It also lured domestic buyers with a new bond tailored for retail investors which drew a whopping 27 billion euros in three tranches.

"I expects Italy plans to return to issue at 15- and 30-year maturities next year," said Chiara Manenti, fixed income strategist at Intesa SanPaolo.

Manenti forecasts a 420 billion euros borrowing target for Italy next year while redemptions will be more evenly spread.

But Italy will still have to contend with political uncertainty and a deep recession which adds to questions about whether it can sustain its 2 trillion euros of debt.

($1 = 0.7746 euros)

(Reporting by Francesca Landini; Editing by Ruth Pitchford)

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