1. UPDATE 1-Italy borrowing costs fall but investors wary


    * First long-term debt sale after Fitch, Moody’s downgradesBy Valentina ZaMILAN, Oct 13 (Reuters) - Italy’s five-year debt costs fell at auction on Thursday helped by a more optimistic outlook for the euro zone debt crisis but there were signs investors are still wary of Italian bonds after two ratings downgrades in less than a week.The country’s towering debt pile and ailing growth rates have made it a focus of the crisis and Moody’s and Fitch cut Italy’s credit-ratings last week following a similar move by Standard & Poor’s in September.Domestic politics has created further uncertainty with Prime Minister Silvio Berlusconi facing a confidence vote in his government on Friday.Italy sold 6.19 billion euros of debt at the auction, close to the top of its target range.Despite solid demand at the sale, yields remained under pressure in the cast bond market and the European Central Bank stepped into the secondary market after the auction, buying Italian debt to cap rising yields.”Overall, then, a reasonably positive outcome but with the still relatively elevated level of borrowing costs underlining the imperative of continued support from the ECB,” said Richard McGuire, a rate strategist at Rabobank in London.Requests for the four bonds on offer totaled more than 9 billion euros. The auction yield on a five-year BTP bond eased to 5.32 percent from a euro lifetime high of 5.6 percent Italy paid a month ago.Market pressures have pushed Italian bond yields over the summer towards levels that could in the long-term threaten the sustainability of the country’s 1.9 trillion euro debt.In a sign of continued tensions, the yield on the 10-year BTP bond on the secondary market rose to its highest level in over two months ahead of Thursday’s auction.Selling a 15-year bond for the first time since mid-July at Thursday’s auction, Italy tested market appetite for a long maturity which traders say is not covered by the ECB’s bond buying programme.It sold nearly 1 billion euro of an off-the-run 2025 bond.”The bid/cover of the 2025 looks OK,” said David Schnautz, a rate strategist at Commerzbank in London.”But I don’t feel very encouraged looking forward for the ultra-long supply, especially towards year-end from Italy.”ECB’s purchases target mainly the five- to ten-year area, traders say.Italy last sold a 30-year bond in May.Italy plans to issue around 75 billion euros in the last quarter of the year, roughly equally split between short-tem bills and bonds.Rome has raised more than 16 billion euros this week.With a make-or-break summit of European leaders on Oct. 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, Italian domestic political turmoil has taken less prominence in investors’ minds.Friday’s confidence vote comes after Berlusconi’s centre-right government lost a key vote in parliament.Analysts said the government was unlikely to fall immediately but its ability to take action would be constantly hampered by internal disputes.

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