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Italy's 10-Year Debt Costs Leap to 4.83 Percent but Demand Healthy

George Clerk | E+ | Getty Images

Italy's 10-year debt costs rose more than half a percentage point on Wednesday at the first longer-term auction since an inconclusive parliamentary election, although they remained below the psychologically important level of 5 percent.

The treasury sold the top planned amount 4 billion euros of a new 10-year bond, with a yield of 4.83 percent, the highest since October 2012. At the end of January, Rome had paid 4.17 percent to sell 10-year paper.

The bid-to-cover was good at 1.65, signalling healthy demand for Italian long-term debt.

Rome also issued 2.5 billion euros of a five-year bond, paying 3.59 percent, up from 2.94 percent one month ago.

The vote cast by Italians the weekend gave none of the political parties a parliamentary majority, raising the risk of prolonged instability and a rekindling of the euro zone's debt crisis.

The results, notably the dramatic surge of the anti-establishment 5-Star Movement of comic Beppe Grillo, left the center-left bloc with a majority in the lower house but without the numbers to control the upper chamber.

"Markets have been underpricing Italian political risk for months and are now struggling to come to terms with an extremely unstable and fluid political situation," said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

The political stalemate could halt reforms needed to spur growth and help Italy cut its massive 2 trillion euro debt pile.

The sale comes in a challenging environment as the outcome of a six-month bill sale and a sell-off on secondary market showed on Tuesday.

(Read More: Why Italy's Stalemate Could Mean Chaos for Euro Zone)

"Italy's debt market is facing its most serious challenge since the announcement of the European Central Bank's bond-buying program last summer," said Spiro.

On Tuesday, Rome's six-month borrowing costs rose by 0.51 percent compared to a similar sale at the end of January and reached their highest level since October 2012, shortly after the ECB pledged to buy bonds of struggling euro zone countries.

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