September 14, 2018 / 1:45 PM / 2 months ago

UPDATE 1-Foreign holdings of Italian bonds hit 15-month low in June

* Data confirm large foreign selling in June

* Domestic banks and households stepped up purchases (Adds comments)

MILAN, Sept 14 (Reuters) - Italian government bonds held by foreign investors fell to 664.3 billion euros ($777 billion) in June, the lowest level since March 2017, central bank data showed on Friday.

International investors have been reducing their exposure to Italy since an anti-establishment coalition took shape in May and went on to form a government in early June, pledging to ramp up public spending and unwinding past deficit-curbing reforms.

Totalling 2.34 trillion euros in July, Italy’s debt runs at more than 1.3 times the national output, making the country vulnerable to rising borrowing costs.

The Bank of Italy data, which were broadly in line with balance of payments statistics published earlier this month, showed foreign holdings of Italian government bonds fell by 57.8 billion euros between May and June.

The new coalition’s anti-austerity plans first leaked in mid-May, sparking a sell-off of Italian assets.

“Against the backdrop of selling by non-resident investors, domestic banks (14 billion euros) and households and non-financial corporates (13 billion euros) stepped in,” UniCredit Deputy Head of fixed-income strategy Luca Cazzulani said.

“We already know from European Central Bank data that Italian banks remained buyers (4 billion euros) in July. From Bank of Italy data published in a separate report, we can conclude that in July banks were particularly active at the short end and in BOT (bills),” he said in a note.

A large domestic sovereign portfolio makes Italian banks vulnerable because falling government bond prices translate into a direct hit on their core capital.

Italy’s banking index has lost 23 percent since mid-May.

Based on Reuters calculations, foreigners held less than 34 percent of Italian government bonds in June, down from 37 percent in April.

The figure includes purchases carried out by the European Central Bank under its bond-buying programme which account for around 9-10 percent of the total.($1 = 0.8546 euros) (Reporting by Giulio Piovaccari, additional reporting and writing by Valentina Za Editing by Mark Heinrich)

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