Italy's debt costs dip again after political clouds clear

By Francesca Landini

MILAN (Reuters) - Italy's long-term cost of borrowing fell at an auction on Friday compared to a month ago, reflecting optimism from investors over U.S. budget talks and a clearing of the air in the domestic political scene.

The positive result followed a sharp fall in Rome's one-year yields at a sale on Thursday and a warm welcome for a new seven-year bond the Italian treasury sold on Wednesday, all endemic of nascent hopes that the euro zone's debt crisis may be easing.

At Friday's sale, three-year bond yields fell 47 basis points compared with mid-September to 2.25 percent, their lowest since May. Borrowing costs on the 15-year paper dipped to 4.59 percent from 4.88 percent, touching a trough of eight months.

The six billion sold in total brought Italy's debt issuance this week to 19.5 billion euros and in terms of the whole year to 84 percent of its annual borrowing target.

"The demand (at today's sale) was very good and allowed the treasury to sell all it wanted," said Chiara Cremonesi, fixed income analyst at UniCredit.

"This week the treasury was able to shift 11 billion euros of medium- to long-term debt, which is really a large amount."

What a difference a month makes. At a mid-September sale bond yields had jumped as worries that Silvio Berlusconi's People of Freedom party could bring down the governing coalition held investors back.

Those clouds cleared last week when the government headed by Enrico Letta won a confidence vote after a revolt by many of Berlusconi's deputies against the former prime minister.

Demand on three-year bonds was 1.41 times the offer compared with a bid-to-cover ratio of 1.52 in September. Bids for the 15-year paper totaled 1.99 billion euros compared with an offer for up to 1.25 billion euros.

Appetite for Italian bonds and other higher-risk assets has been boosted by signs U.S. politicians are on the verge of a compromise that would evade a historic debt default before an October 17 deadline.

Among this week's issues, Italy raised 5 billion euros through a new seven-year fixed coupon BTP bond that will be added in coming months to the treasury's usual toolkit for refinancing its 2 trillion euros debt.

According to UniCredit estimates, after this week's placements Italy will have to issue 35 billion euros of medium- and long-term debt to meet its 2013 funding target. This compares with 38 billion euros in medium- and long-term debt redemptions and 9 billion euros of coupons by year-end.

(Additional reporting by Irene Chiappisi; editing by Patrick Graham)