Italy paid 4.71 percent on Tuesday to borrow for two years, the highest since December, reflecting investor doubts that a European summit later this week can deliver a decisive answer to the currency union's debt crisis.
Speculation has increased that Italy — dogged by rising costs on its 1.95 trillion euro ($2.4 trillion) debt pile and a deepening economic recession — may find it hard to continue finance its own debt after five other eurozone economies have already tapped the bloc's emergency funding.
"Yields have risen sharply, confirming the trend evident on short Italian and Spanish bonds in recent days," said Chiara Manenti, a strategist at Intesa Sanpaolo in Milan. "But they basically met the top of their issue range, which is positive."
Steady support from domestic investors helped Rome sell a total of 3.9 billion euros in zero-coupon and inflation-linked bonds on Tuesday, near the top of its planned range.
But with scant appetite for Italy's bonds outside its borders, analysts warn that domestic buyers will find it increasingly difficult to keep shouldering the bulk of the Treasury's issuance.
European policymakers are becoming increasingly worried about the dangers posed by vulnerable banks buying much of the debt issued by their overburdened governments.
Italy is estimated to be slightly more than halfway through an annual bond issuance plan worth 215 billion euros.
The Treasury returns to the markets on Wednesday selling 9 billion euros in six-month bills and faces this week's toughest challenge on Thursday at a sale of five- and 10-year debt for up to 5.5 billion euros.
"Thursday's auction is slightly more worrying as the market will be extremely sensitive to any comments from European leaders at the start of the (two-day EU) summit," said Matteo Regesta, a strategist at BNP Paribas in London.
The summit is meant to sketch out a roadmap towards economic union in the currency bloc but Germany's opposition to debt mutualization among member states has led investors to expect little progress towards decisive solutions in the short term.
On Tuesday Italy paid nearly 70 basis points more than a month ago on zero-coupon bonds due in May 2014. The sale was covered 1.65 times by bids, roughly in line with May's slightly bigger auction.
The Treasury also placed 916 million euros of two inflation-linked bonds due in September 2016 and September 2026, with bids totaling 2.3 times that amount.
It paid 5.20 percent on the 2016 linker, up from 4.39 percent a month ago.
The second tranche of a 2026 linker, first issued in June 2011, was sold through a syndicate of banks at an average 5.29 percent rate.
Spain, which on Monday formally requested a European bank rescue, paid sharply higher yields on Tuesday to sell 3 billion euros in short-term paper.
The yield on six-month T-bills rose 1.5 percentage points from the previous sale to 3.24 percent.
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