Borrowing Costs Rise as Italy Auctions 10.5 Billion Euros of Debt

Italy has sold 10.5 billion euros of bills and bonds as borrowing costs on the shorter-term securities rise to a three-year high as concerns over the region’s sovereign debt crisis continue to mount.

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The Italian Treasury sold 8.5 billion euros of 182-day bills to yield 3.535%, their highest yield since September 2008, and up from 3.071% at the last auction of similar maturity debt on September 27. The Treasury also sold 2 billion euros of 2013 zero-coupon bonds at a yield of 4.628%, up from 4.511% at the September 27 auction.

Demand for the shorter-term securities declined from 1.74 times the amount on offer at last month’s auction, to 1.57 times in the most recent auction. Demand for the 2013 securities rose from 1.57 times last month, to two times the amount on offer.

The auction comes as European Union leaders increase pressure on Italian Prime Minister Silvio Berlusconi to speed up the process of overhauling the nation’s budget in order to reduce its debt load of more than $2 trillion, which is roughly 120% of Italy’s annual gross domestic product.

Incoming European Central Bank President Mario Draghi said in a speech in Rome today that Italy’s bond yields could be quickly reduced through the implementation of all required reforms.

European leaders meet again today in Brussels for their second summit in four days, at which they will work on a strategy for combating the euro-zone debt crisis. Berlusconi and Umberto Bossi, his ally in the Northern League, agreed last night to send a letter to the EU ahead of today’s summit to explain their plan to increase the retirement age to 67.

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The ECB began buying Italian bonds on August 8 in order to keep down borrowing costs. The premium that investors demand in order to hold Italy’s 10-year bond instead of German bunds narrowed 2 basis points to 287 basis points today following the auction. The current yield on an Italian 10-year bond is 5.95%.