Mon Apr 29, 2013 6:30am EDT
By Francesca Landini
MILAN, April 29 (Reuters) - Italian benchmark borrowing costs fell to their lowest since October 2010 at auction on Monday, signalling a thumbs-up from investors to the appointment of a new government that ended two months of political stalemate.
The treasury sold all of its planned 3 billion euros ($3.9 billion) of 10-year bonds at 3.94 percent, well below the 4.66 percent it paid at a similar sale one month ago. It also sold 3 billion euros of five-year bonds at 2.84 percent, 0.82 percentage points less than in March.
"The auction went fine, both in terms of demand and especially of yields," said Luca Cazzulani, rate strategist at UniCredit.
Investors did not seem worried that the new administration still needed to clear the hurdle of a parliamentary vote later on Monday, he said.
Others suggested the strong debt sale failed to reflect continuing political tensions and a deep economic crisis that rating agency Moody's warned meant Italy might eventually need to seek a bailout.
"While post-crisis market sentiment towards Italy has never been better, economic conditions have never been worse,..." said Nicholas Spiro, Managing Director of Spiro Sovereign Strategy.
"The disconnect between Italy's bond market and the real economy is likely to increase further in the coming days and weeks."
Centre-left Prime Minister Enrico Letta is expected to win the confidence vote, which is due to start around 1800 GMT.
But with doubts over whether his government will last a full five-year term, Letta is expected to try to pass a few basic reforms quickly, including a change to Italy's much criticised electoral laws and a cut in the size of parliament.
Francesco Garzarelli, strategist at Goldman Sachs, said bond markets had yet to fully price in the composition of Letta's cabinet, notably Bank of Italy Deputy Governor Fabrizio Saccomanni as economy minister.
"This could be seen as an additional positive element as it signals a higher longevity of the new executive than just a few quarters," Garzarelli wrote in a note for clients.
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