Investors flush with cheap European Central Bank funds are expected to help Italy raise up to six billion euros at a bond auction on Wednesday and bring the nation's 3-year borrowing costs below 3%, half what it had to pay a few months ago.
Relief at Greece's successful debt restructuring is also set to sustain a rally that has brought Italian short-term yields back to levels last seen long before the country began to be buffetted by the euro zone debt crisis in July.
Italy aims to sell up to 5 billion euros ($6.5 billion) of a new three-year BTP bond maturing in March 2015. In a sign of easing market pressure on the euro zone's third-largest economy, the Treasury has set the coupon on the new issue at 2.5%.
That compares to a 6% coupon on a three-year BTP bond Italy launched in late November, when it came close to following Greece, Ireland and Portugal into a scramble for emergency aid that could have become prohibitively expensive for Europe.
Market concerns have eased since then, aided by the ECB's decision to provide banks with unlimited three-year funds and the appointment of a reform-oriented government in Rome.
UniCredit analysts expect Italy's three-year debt costs to fall to around 2.8% on Wednesday - roughly in line with where the new bond traded informally on the eve of the auction - from 3.4% at a previous sale in mid-February.
"Clearly there is interest for this segment of the curve, as Tuesday's bill auction also shows," said UniCredit's strategist Luca Cazzulani. "With a fair value yield of 2.7%, the new BTP in our view offers a really good opportunity considering a cost of liquidity (from the ECB) of 1%."
Italy paid only 1.4% to sell one-year debt on Tuesday, the cheapest yield on this maturity since August 2010.
It will also sell an off-the-run Sept. 2019 bond for up to 1 billion euros on Wednesday.
The challenge for Rome is to attract enough interest also on longer maturities, where economic fundamentals play a bigger role and foreign buyers account for a larger share of demand. Italy is already in recession and the Bank of Italy expects the economy to shrink up to 1.5% this year.
Rome faces bond redemptions worth 54 billion euros in March and April alone. It has met so far slightly more than a fifth of an estimated target of 215 billion euros for bond issuance this year.