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Italy gets away €5bn two-year bonds at lower cost

ITALY'S borrowing costs dropped sharply as it sold the maximum amount of €5bn at an auction of short-term debt yesterday, helping drive down yields on its longer-dated bonds ahead of next week's crucial sale of five- and 10-year bonds.

It was another sign of the relative buoyancy on the European bond markets that allowed the National Treasury Management Agency earlier this week to swap bonds due in 2014 for bonds due in 2015.

There was more good news for Ireland in the bond market yesterday. LCH Clearnet, Europe's biggest clearing house, reduced the deposit it demands when bond dealers trade Irish government bonds. The influential market player "clears" or processes bond trades.

In the lead-in to the Irish bailout LCH frequently increased the cash deposit it demanded for dealings in Irish bonds, making them less attractive an investment.

Yesterday it cut the margin to 35pc from 45pc. Traders will get a cash payout today if they have already paid the deposit.

Yesterday's auction by Italy was also a vindication of sorts for the European Central Bank which has flooded the continent's banks with cheap money by lending €500bn at very low rates to lenders.

It was Italy's first sale since Standard & Poor's downgraded Italy by two notches. Yields on its two-year zero-coupon bonds fell to 3.76pc -- the lowest since August and more than a percentage point less than it paid a month ago.

"The Treasury managed to sell at the top of the range and at a lower yield," said Sergio Capaldi, an analyst at Intesa Sanpaolo in Milan. "We are returning to (yield levels seen) last summer but we still have a long way to go before the situation normalises. A year ago yields were below 3pc."

Italian government bond yields and the cost of insuring its debt against default fell after the auction, with the yield on its benchmark 10-year bond 15 basis points lower on the day at 6.09pc.

Longer-dated bonds have rallied less and next Monday's sale of up to €8bn is considered an important test of demand for Italian paper among international investors whose support it will need to meet this year's huge debt target. (Reuters)

Irish Independent