Wed Apr 24, 2013 6:14am EDT
By Francesca Landini
MILAN, April 24 (Reuters) - Italy's two-year debt costs fell on Wednesday to their lowest level since European Monetary Union in 1999 as the expected appointment of a new prime minister looked set to end two months of post-election deadlock.
Bets the European Central Bank will cut interest rates as soon as next week are also fuelling a hunt for yield that is benefiting Italian and Spanish debt.
"The auction outcome is really strong as the funding costs for Italy fell sharply," said Luca Cazzulani, rate strategist at UniCredit.
The treasury sold 2.5 billion euros of two-year zero-coupon bonds, paying a yield of 1.17 percent, much lower than the 1.75 percent it paid at a similar sale one month ago.
Rome issued also 0.75 billion euros of inflation-linked bonds maturing on September 15, 2023, reaching the total top-planned amount for the sale.
Italian President Giorgio Napolitano called Enrico Letta, deputy head of the centre-left Democratic Party, to a meeting on Wednesday in a move widely seen as a prelude to asking Letta to form a new government.
"Hefty redemptions helped the sale, but the Italian debt market is underpinned today mainly by the expectation a new government will be formed soon," said Sergio Capaldi, strategist at Intesa Sanpaolo.
The new coalition government, which could take office in a matter of days, would be backed primarily by rivals on the centre-left and centre-right, the same parties that had refused to cut a deal after the Feb. 25 elections.
Hopes that the impasse would soon be over triggered a rally in the bond market, driving yields on 10-year Italian government bonds below 4 percent on Tuesday, to the lowest levels in two years and a half.
A monthly German Ifo survey of economic sentiment that fell well short of expectations meanwhile bolstered expectations that an interest rate cut by the ECB may come soon.
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UPDATE 1-Italy's two-year borrowing costs tumble to euro-era low
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