UPDATE 1-Italian bonds 'encouragingly' steady as debt auction flies

* Italy sells maximum 8.5 bln euros of debt in auction

* Italian 10-yr yields rise just 5 bps to 1.55%

* High-grade yields rise as risk sentiment improves

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites to reflect Italian auction result)

By Abhinav Ramnarayan

LONDON, March 31 (Reuters) – Italian government bond yields were steady as the country successfully sold 8.5 billion euros of debt in an auction amid hefty ECB stimulus and hopes the country’s efforts to contain the spread of the novel coronavirus may be starting to work.

Italy’s Treasury comfortably sold the top planned volume of 8.5 billion euros ($9.4 billion) over four bonds on Tuesday, with demand totalling almost 1.5 times the amount placed.

Even though the yields at which the bonds were sold were the highest in eight months, the overall result was strong, analysts said, particularly as the Italian bond market remained relatively unmoved by the new supply.

“In the midst of a full-blown crisis, this is very encouraging; almost as if it’s business as usual. It is a testament to the success the ECB has had in calming peripheral markets with its beefed-up QE programme,” said Rabobank strategist Richard McGuire.

He was referring to the European Central Bank’s announcement that it would buy 750 billion euros of debt this year under a new Pandemic Emergency Purchase Programme.

In addition, the latest numbers from Italy show a decreasing number of new infections, suggesting the country’s strict lockdown and social distancing measures are finally working.

McGuire was a bit more cautious on this data, saying it was premature to say that Italy is out of the woods.

But ECB stimulus has certainly played a part in calming investor nerves over the past week and Italian yields were only few basis points higher after the auction. Bonds tend to sell off sharply during a major sale as investors sell outstanding debt to buy the new supply.

Italy’s benchmark 10-year yields was up six basis points at 1.55%, but still nearly half what they were on March 18, when panic over the impact of the disease was at its peak.

High-grade euro zone bond yields, such as Germany’s, rose five to seven basis points across the board on improved risk sentiment.

Italy has not only been the epicentre of the coronavirus crisis in Europe, but its ratio of debt to gross domestic product is among the highest in the euro zone and likely to go much higher as it grapples with the economic fallout.

The country’s credit rating is only a couple of notches away from junk, potentially taking it out of investment-grade indexes, an additional source of concern. (Reporting by Abhinav Ramnarayan, editing by Larry King and Bernadette Baum)

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