Italy's short-term debt costs halved at auction today as a new austerity package and an injection of cheap long-term money from the European Central Bank won Rome some respite in thin year-end markets.
But analysts warned that market nerves could easily reignite and pointed to a tougher test tomorrow, when Italy will sell up to €8.5 billion of longer-term bonds, including three- and 10-year paper.
Still, the lowest six-month auction yield and strongest bid-to-cover ratio since September added to a sense that some of the tension around the countries now at the centre of Europe's debt problems had eased for a moment.
The outcome provided a temporary boost to European stocks and the euro. Caution returned later in the session pushing Italian bond yields higher ahead of Thursday's sale.
"This is the first piece of good news for Italy's bond market since the crisis erupted (for Rome) in July," said Nicholas Spiro of Spiro Sovereign Strategy.
"While today's auction was supposed to be the less challenging of this week's two sales given the shorter maturity of the debt on offer and the predominantly domestic buyer base, it's still a success."
Italy paid an average rate of 3.25 per cent to sell €9 billion of six-month BOT bills, down from a euro lifetime record of 6.5 per cent just a month earlier. It also sold €1.7 billion of 24-month, zero-coupon bonds, near the low end of its target range. The yield fell to 4.85 per cent, from 7.8 per cent a month ago.
Since then the ECB has flooded euro zone banks with almost €500 billion of longer-term liquidity and the Rome government has overcome internal opposition to a radical pension reform as part of Italy's third budget package since the summer.
Spain's six-month debt costs also more than halved to 2.4 percent at an auction on the eve of the ECB's bumper tender for three-year money on December 21.
"Many things have changed from a month ago," an Italian bill trader said. "This doesn't mean we can rule out further problematic auctions. Markets are easily unnerved."
