UPDATE 1-Italy's 10-yr debt auction costs fall to six-month low
(Adds analyst comments, details)
MILAN, Oct 30 (Reuters) - Italian 10-year debt auction costs fell to their lowest in six months on Wednesday, driven down by expectations that central banks in the U.S. and Europe will keep providing ample liquidity in coming months.
In its third debt sale this week, Italy paid 4.1 percent on a bond maturing in March 2024.
That was down from 4.5 percent at a similar auction a month ago though well above the 1.7 percent that Europe's strongest sovereign issuer Germany paid to issue 10-year Bunds on Wednesday.
The risk Italy's fragile left-right coalition would collapse pushed up the country's funding costs last month, but the market mood has improved since the government survived a confidence vote in early October.
The Treasury raised a total of 6 billion euros ($8 billion) in bonds, at the top of its planned range, bringing this week's overall issuance to 17.5 billion euros to reach 88 percent of its full-year funding target.
Italy also sold a new tranche of a Dec. 2018 bond at 2.89 percent, well below the 3.38 percent it paid a month ago.
Both the 2018 and the 2024 bonds drew stronger demand than at the end of September, with bids supported by 23.5 billion euros in redemptions and coupon payments.
"A well-bid auction, with a particularly strong demand for the five-year bond," ING strategist Alessandro Giansanti said.
"With the prospect of continued accommodative policy by the Fed and further expansionary moves by the ECB, clearly Italian bonds offer interesting returns in terms of carry trades."
In a carry trade investors borrow money at a low interest rate to invest in an asset expect to yield higher returns.
The U.S. Federal Reserve, which winds up a two-day policy meeting on Wednesday, is expected to keep its monetary stimulus at current levels until early next year.
Similarly, the ECB is seen loosening monetary policy further to counter the strength of the euro and curb a rise in money market rates due to dwindling excess liquidity in the euro system as banks repay the central bank's long-term loans.
Healthy demand from investors focused on monetary conditions helped Italy pay the lowest yield since May on six-month and two-year debt at this week's previous two auctions.
"The absence of any major events until year-end has prompted investors to shift into non-core markets to obtain higher yields," Citi analysts wrote in a note.
On the domestic political front, investors are now largely overlooking simmering tensions in the ruling coalition as a vote nears on whether to expel centre-right leader Silvio Berlusconi from parliament and the budget bill makes its way through the legislature.
"As long as markets choose to screen out the bad news in the euro zone and focus on the good, Italy can continue to muddle through," said sovereign risk consultant Nicholas Spiro.
($1 = 0.7262 euros)
(Reporting by Valentina Za, editing by Silvia Aloisi, John Stonestreet)