By Valentina Za
MILAN (Reuters) - Italy paid at least a full percentage point more than a month ago to sell 3.44 billion euros of debt on Tuesday, as worries about politics in the Netherlands and France weighed on euro zone bond markets.
Steady demand allowed the Treasury to roughly sell the 3.5 billion euros maximum of two-year bonds and inflation-linked paper it had hoped to place ahead of a more challenging longer-term bond auction later this week.
It paid 3.36 percent on its two-year zero-coupon bond, up from 2.35 percent a month ago - reflecting both growing nerves around Italy and Spain's finances and the commitment of euro zone's core economies to a path of budget austerity.
These levels compare to a euro-era high of 7.8 percent for the zero-coupon paper at the height of the crisis in November, when Italy's debt pile was threatening to spiral out of control.
The 2.5 billion euro zero-coupon sale was covered 1.8 times, roughly in line with a month ago.
"Demand is holding up but at an increasingly hefty price for the Treasury," said Nicholas Spiro at Spiro Sovereign Strategy.
Bids were likely helped by 12 billion euros of similar bonds maturing at the end of April - the last leg of a 90 billion euro February-to-April refinancing hump which markets had worried Italy would struggle to overcome.
The Treasury has virtually no medium and long-term maturities in May and June, giving it some wiggle room at a time of rising market tensions.
The collapse of the Dutch government in a crisis over budget cuts and uncertainty over elections in France and Greece are adding to general fears that the euro zone debt crisis has much further to run.
The Netherlands comfortably sold 2 billion euros in bonds on Tuesday. Spain also sold 1.9 billion euros in bills, at markedly higher yields.
Italy also sold 943 million euros of two off-the-run inflation linked BTPei bonds maturing in 2017 and 2019.
It paid an average 4.32 percent yield on the September 2019 bond, up from 3.06 percent at the previous auction a month ago.
The September 2017 BTPei, last sold in May 2010, yielded 3.88 percent at auction.
Italy's 1.9 trillion euro debt and shrinking economy make it vulnerable to falling investors' confidence while its government struggles to push a key labor reform through parliament and further contain public spending.
The yield premium its benchmark 10-year bonds pay over German Bunds is back above 400 basis points after falling to 280 basis points in March, when a flood of cheap loans from the European Central Bank helped Italian lenders to buy more government bonds and push down yields.
The Treasury will offer up to 6.25 billion euros of bonds on Friday, including five- and 10-year debt, after a sale of 8.5 billion euro in six-month treasury bills on Thursday.
Rome has so far met around 38 percent of an estimated bond issuance target of 215 billion euros for 2012.
(Reporting by Valentina Za; editing by Patrick Graham)