UPDATE 2-Italy funding costs rise before vote, sells 30-yr bond
(Recasts, writes through)
MILAN, Feb 13 (Reuters) - Rising uncertainty about the outcome of Italy's general election pushed up borrowing costs at its last debt sale before the poll, but the country also managed to sell its first 30-year bond in nearly two years.
The ultra-long debt sale - which would have been unthinkable just half a year ago, when Italian yields were at euro-era highs - suggests investors are increasingly confident that the country will resolve its problems and that the single currency will survive.
But Wednesday's auction also brought a sharp rise in the cost to Italy of three-year money from the last sale in January as markets fret that the Feb. 24-25 poll will deliver a weak government and slow reforms needed to spur growth and cut debt.
Rabobank rate strategist Lyn Graham-Taylor described the sale as "a mixed bag", with the successful 30-year sale balanced by relatively weak results for other maturities.
"The yield for the three-year emphasises the recent increase in yields for peripheral paper as anxiety has mounted about the upcoming elections in Italy, Cyprus bailout talks and Spanish political concerns," he said.
"The 2040 bond is also likely to have benefited from the lack of long-end Italian supply in recent history."
Italy sold 3.449 billion euros of three-year bonds at a yield of 2.30 percent, up from 1.85 percent at the last such sale in mid-January, although still substantially below the 2.5 percent it paid in December.
A January rally drove Italian and Spanish yields to multi-year lows but they have risen in recent days, reflecting political uncertainties in the two countries, the euro zone's third- and fourth-largest economies respectively.
Spanish Prime Minister Mariano Rajoy is facing calls to resign over a corruption scandal, while former Italian premier Silvio Berlusconi's surprise comeback in polls less than two weeks before elections has unsettled investors.
Italy's three-year funding costs were 5.3 percent last June, before the European Central Bank's September pledge to buy bonds of countries seeking aid helped calm the euro zone debt crisis which is now in its fourth year.
Their euro-era peak was 7.89 percent in November 2011 when the government headed by Berlusconi was forced to resign and a technocrat cabinet led by Prime Minister Mario Monti took power.
Investors also bought 888 million euros ($1.2 billion) on Wednesday of debt maturing in September 2040 at a yield of 5.07 percent - the first time Italy has sold 30-year debt at a regular sale since May 2011.
"The 30-year bond reopening went very well, with the yield at auction below the 5.12 (percent) seen on the secondary market, and a strong bid-to-cover," said Filippo A. Diodovich at IG Markets, adding that investors had not seemed especially worried about the election.
The successful sale could open the way for a new ultra-long benchmark bond once uncertainty around the election dissipates.
Wednesday's sale, which also included a 15-year bond and a five-year floating rate CCTeu certificate linked to Euribor, raised a total 6.63 billion euros, just under the treasury's maximum targeted amount of 6.75 billion euros.
Italy has now completed about 18 percent of its estimated total borrowing for 2013.
After the sale, 10-year Italian government bond yields were 14 basis points lower at 4.48 percent, having risen 34 basis points since late January.
Investors fear this month's vote will return a fragmented parliament and a weak government, threatening the structural reforms needed to cut Italy's 2 trillion euro debt pile and revive its moribund economy.
Final polls on Friday showed the centre-left is on course to win despite Berlusconi's remarkable surge, but is likely to have to form a governing coalition with outgoing premier Monti. ($1 = 0.7427 euros)
(Additional reporting by London and Milan bond desk; Writing by Catherine Evans)