The sale of 9 billion euros ($11.8 billion) of six-month Treasury bills was seen as the first postholiday indication of the condition of the beleaguered euro zone, the 17 members of the European Union that use the euro.
The bills were sold at a yield of 3.251 percent, down from 6.504 percent at a previous auction in late November. Demand was 1.7 times the amount offered, compared with 1.47 times previously.
In an auction of two-year bonds, which raised 1.7 billion euros, the yield fell to 4.853 percent from 7.814 percent last month. The auctions raised a total 10.7 billion euros.
The lower borrowing costs appeared to reflect the adoption of a new austerity package in Italy, as well as a huge infusion of low-cost, long-term liquidity into euro zone banks by the European Central Bank last week.
With the central bank now charging only 1 percent interest on three-year loans, banks can take the cash, buy short-term securities and earn a quick profit.
In anticipation of the loans, Spain’s borrowing costs fell drastically at an auction on Dec. 20. And the central bank will offer the three-year loans again in late February.
On Thursday, Italy plans a sale of 8.5 billion euros ($11 billion) in long-term debt, which analysts said would be a more significant indicator of market sentiment.
The brighter outlook for Italy was reflected elsewhere in the debt markets, where Spain’s long-term borrowing costs fell to almost 5 percent. German bonds, a benchmark for the euro zone, edged lower to 1.89 percent.
“The target size of the auction was in line with the intended amount,” analysts at IFR Markets wrote in a note after the Italian debt sale, “so over all a smooth auction.”
The sale of long-term debt on Thursday probably will “go the same way,” they added, “as domestic players come in to support” the bonds.
Nevertheless, there was evidence that the financial system remained stressed. The central bank reported that banks in the euro zone had deposited a record amount of overnight funds for the second day in a row. Banks parked 452.03 billion euros ($584 billion) for 24 hours, beating a previous record of 411.8 billion euros set on Tuesday.
The heavy use of the deposit facility indicates that banks in the euro zone remain wary of lending to one another, although analysts note that market activity has been muted because of the year-end holidays, and there is more cash in the system after the central bank’s action.
Italy has been in the spotlight as a result of slow growth combined with escalating borrowing costs and a debt equal to 120 percent of gross domestic product. It needs to raise 450 billion euros ($582 million) in 2012.
Italy suffered its biggest decline in Christmas retail sales in 10 years, according to data released this week by the consumer group Codacons.
Article source: http://www.nytimes.com/2011/12/29/business/global/italys-borrowing-costs-drop-sharply-at-auction.html?partner=rss&emc=rss