Italy expected to clear 10-year bond sale hurdle

MILAN - Italy is expected to sell all it wants of a new 10-year bond at auction on Thursday, clearing the last hurdle of a busy refinancing week, as investors bet that a European Central Bank bond-buying plan will stabilise weaker euro zone members.

The bond sale will be the first for Italian longer-term bonds after the ECB's pledge to take steps to ease borrowing costs in the euro zone. The central bank is due to unveil details of its mechanism at a key September 6 meeting.

In the meantime, Rome may have to accept that yields for the 10-year bond will break above 6 percent again to attract investors, and the secondary market could be volatile.

An effective system of bond-buying by the ECB could give Italy longer-term relief as it struggles to reduce its mammoth 2 trillion euros ($2.5 trillion) of debt while its economy shrinks.

"Investors give credit to the European Central Bank, and this is supporting bond markets even for vulnerable euro zone countries like Spain and Italy," said Alessandro Giansanti, strategist at ING in Amsterdam.

On Thursday Rome will seek to sell up to 6.5 billion euros in five and 10-year bonds, together with up to 1 billion euros of floating rate CCTeu notes.

"The Treasury will target the maximum amount of 4 billion euros on the new 10-year maturity, without getting too annoyed with a possible rise of the yield over 6 percent," he added.

The Treasury placed without difficulty 12.75 billion euros in shorter-term debt on Tuesday and Wednesday, with yields falling sharply at both auctions.

Italy faces redemptions of 29 billion euros in September, so is under more refinancing heat than Spain.

The new 10-year bond, maturing on November 20-22, is set to become the next benchmark for Italy.

The current 10-year benchmark was yielding just below 5.8 percent late on Wednesday, flat on the day, at a stable 440 basis-point premium to the equivalent German Bund.

"The Treasury can count on a solid base of specialist banks at auctions," said Chiara Manenti, fixed income strategist at Intesa Sanpaolo in Milan. "But market adjustments after the sale could not be ruled out."

The real challenge for Italy is to regain broader market confidence while its government carries out much-needed structural reforms.

On Wednesday, Prime Minister Mario Monti received German Chancellor Angela Merkel's backing for his reforms, which she said would ultimately help reduce Rome's borrowing costs.