Italy to keep debt profile outside riskier area

MILAN (Reuters) - The average lifespan of Italian debt, which has fallen during the euro zone crisis as investors favor safer short-term issues, should still be close to the current level of 6.8 years at the end of 2012, a top Italian debt official said.

As the average maturity of a country's debts falls, the amount of bonds it has to sell each year rises. This makes it more exposed to a worsening in market sentiment that could push borrowing costs higher, even to unaffordable levels.

Italy's measure has fallen below 7 years since the end of 2011 as banks, flush with cheap three-year loans from the European Central Bank, loaded up on shorter-dated issuance, while demanding higher returns on riskier longer-term bonds.

The figure is still relatively long compared with most countries, however, leaving only a small proportion of Italy's debt pile, the world's fourth-largest, to be refinanced each year.

In an interview with Reuters, the head of the Treasury's debt management office Maria Cannata said she saw no imminent easing in recent tensions over Italian bonds and conceded that the month ahead would be "tricky".

"We believe the average life of Italian debt at the end of the year won't differ too much from the current level of 6.8 years," Cannata said on Thursday.

New elections in Greece which could endanger the country's euro membership have pushed Italian 10-year yields to 6 percent, a closely-eyed threshold which has triggered a spiral in other euro zone countries' borrowing costs.

"I believe the month ahead will be rather tricky. A normalization of market conditions is not around the corner. I think it will take a few months," Cannata said.

"Over the last few days we have seen some tensions on the Italian yield curve in the two-to-three-year sector, but nothing too worrying. And bills are performing rather well."

Analysts at JP Morgan warned this month that Greece's exit from the euro - of which they see a 50 percent chance over the next year - may shut Italy and Spain off funding markets.

Cannata did not comment about risks stemming from the Greek turmoil.

Last November, yields on shorter Italian maturities had overshot longer-term ones, reflecting default concerns among investors. Italian two-year yields stand at 3.7 percent.

RETAIL BOND

Cannata said Italy would soon return to tap small investors with a new inflation-linked bond. The first such issue in March raised a much larger-than-expected 7.3 billion euros.

With international bond markets rattled by worries about Greece and Spanish banks, savings-rich Italian households could again offer the Treasury a useful alternative funding channel.

"At a conference on Friday I will talk about a new inflation-linked bond aimed at retail investors the Treasury is working on, and I can say it won't be too long before we actually launch it," Cannata said.

The Treasury uses proceeds from retail bonds to cut bill issuance, after boosting these ultra-short maturities helped it overcome a refinancing hump in early 2012.

Cannata said bills would account for slightly more than half of a total gross funding target of 440-450 billion euros for 2012 - which has been met for around 47 percent at present.

After successfully refinancing 90 billion euros of bonds between February and April, Italy has no bond redemptions which could feed reinvestment flows in May-June.

This month's auctions confirmed steady interest from investors - mostly domestic - for short Italian maturities, but Italy also sold its longest maturity since October by placing a 2025 'off-the-run' bond. These bonds are no longer sold on a regular basis and tapped following requests from primary dealers.

"The 2025 bond sold this month shows that the Treasury is open to issuing longer maturities if market conditions in terms of cost and demand are reasonable," Cannata said. "Demand for Italian bonds is quite lively in the 10-year sector."

Italy last issued a regular bond with a maturity longer than 10-years in July 2011, when the country first slid into the euro zone debt crisis.

Cannata said the target of an average debt life of 6.8 years would be reached even if the offer of bonds longer than 10 years remained confined to off-the-run issues, which are relatively smaller in size.

(Reporting by Luca Trogni and Valentina Za; Editing by Gavin Jones)

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