Wed Jun 26, 2013 6:18am EDT
By Francesca Landini
MILAN, June 26 (Reuters) - Italy's short-term debt costs almost doubled at an auction on Wednesday as expectations of a reduction of U.S. monetary stimulus continued to weigh on riskier assets.
The treasury sold 8 billion euros ($10.5 billion) of six-month bills, paying a return of 1.05 percent, compared with 0.54 percent it paid at a similar auction one month ago.
The yield, the highest since February, came in line with the secondary market, while demand was 1.36 times the offer, down from a bid-to-cover ratio of 1.58 one month ago.
"The rise in the rate and the fall in the bid-to-cover ratio reflect the tensions triggered in recent days by fears the central banks will withdraw some liquidity from the markets," said Alessandro Giansanti, fixed-income analyst at ING.
"The market seemed to have calmed down a bit today thanks to the reassurance by the European Central Bank that its monetary policy will remain accommodative for long."
Some of the world's top central bankers sought on Tuesday to calm markets that have reacted strongly to the U.S. Federal Reserve's plan to slow its bond-buying stimulus. "In terms of monetary policy, price stability is assured, and the overall economic outlook still warrants an accommodative stance, the exit from which by the way is still distant," ECB President Mario Draghi said in Berlin. Draghi confirmed his dovish tone on Wednesday in Paris.
Investors shrugged off for now doubts over Italy's exposure to derivative contracts which, according to media reports, could cause a loss of 8 billion euros for the country, traders said.
"The news on derivative contracts is not having an impact on the market which has been choppy and nervous since last week," said a trader at an Italian bank.
Italy risks losses potentially running into billions of euros on derivatives contracts it restructured at the height of the euro zone debt crisis, the Financial Times and Italian daily La Repubblica reported on Wednesday, quoting a Italian treasury document.
In response to the reports, the treasury said there was no danger to state finances.
Italy will face a tougher market test on Thursday when it offers up to 5 billion euros of five- and 10-year bonds.
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