Italy sold 11 billion euros of bills, keeping up with the success of a short-term bond sale the previous day and boosting the mood on the market ahead of a more challenging longer-term debt sale on Monday.
Market sentiment toward Italy, whose size means it could threaten the entire euro zone if its debts run out of control, has turned more positive in recent days.
The near half-trillion euros injected into the region's banks by the European Central Bank and signs that Italy's new government is getting on top of its spending have helped to pull the country back from the edge.
At Friday's sale, Italy's six-month debt yields fell to 1.97 percent, well below an auction level of 3.25 percent a month ago and a far cry from a euro lifetime record of 6.5 percent Italy paid in November to sell six-month paper at the worst of the crisis.
"The auction went well, it confirms the trend towards a clear fall in yields at the shorter-end of the curve," said Chiara Manenti, an analyst at Intesa Sanpaolo.
This week's auctions were the first ones held after Standard & Poor's cut Italy's long-term debt rating to 'BBB+' in a spate of euro zone sovereign downgrades.
Italian 10-year yields fell below 6 percent on the market after the bill sale. They had pierced this psychologically important level for the first time in six weeks on Thursday, following the good outcome of the bond sale.
Though analysts caution it is too early to say that Italy has turned a corner, the improved market climate looks set to help Monday's sale of up to 8 billion euros, including five- and 10-year maturities.
These longer-dated bonds have been left behind in a rally of shorter maturities driven by a 490-billion-euro injection of cheap three-year ECB funds in December.
Analysts say those funds have spurred domestic banks' demand for Italian and Spanish government bonds which they can use as collateral to borrow from the ECB.
This week Spain paid 1.85 percent to sell 1.1 billion euros of six-month debt.
The euro zone central bank will offer another batch of three-year funds in February, which some analysts think will provide further support for bonds issued by the region's most indebted states.
Italy has said it plans to take advantage of firmer demand for short-term debt in the first part of the year to help it meet a challenging gross funding target of 450 billion euros for 2012. Between February and April alone some 90 billion euros of bonds come due.
Friday's sale brings a net inflow of 3.5 billion euros. The only weak spot in the 8 billion euro six-month sale was that it was covered 1.3 times, down from 1.7 times at a slightly bigger end-December sale.
"The bid-to-cover ratio is the lowest in a year on T-bills. Nothing to worry about but just a sign that the significant amount of bills the Treasury is pushing through may in the future turn out to be a little problematic," said Alessandro Giansanti, an analyst at ING in Amsterdam. For the latest updates PRESS CTR + D or visit Stock Market news Today
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