Italy was forced to pay investors higher rates to raise 6.5 billion euros in an auction of medium- and long-term bonds on Wednesday, but not as much as feared.
Just two days after an inconclusive election result rekindled fears about whether Italy would keep to deficit-cutting policies, the treasury raised 4 billion euros in 10-year bonds at a rate of 4.83 per cent against 4.17 per cent in the previous auction on January 30.
Dow Jones Newswires said it was the highest rate paid at a bond auction since October.
"Whilst the interest payable is significantly higher than in recent auctions as a result of the blurred political picture, fears of a 5 per cent-plus figure proved unfounded," said CMC Markets trader Matt Basi.
Italy also raised 2.5 billion euros in 4-year bonds at 3.59 per cent against 2.94 per cent on January 30.
Demand surpassed supply by 1.65 times for the 10-year bonds and 1.6 times for four-year bonds.
Leftist leader Pier Luigi Bersani on Tuesday admitted he had failed to win parliament -- without a majority in the Senate -- and warned that the country was in a "dramatic situation".
The Italian business daily Il Sole 24 Ore said Wednesday that it did not exclude the yield on 10-year bonds rising above the psychological 5.0 per cent level given the tension on the markets following the inconclusive result of the election.
On Tuesday, the yields on Italian government 10-year bonds jumped on the secondary market to 4.897 per cent -- the highest rate in three months -- from 4.490 per cent on Monday as investors demanded better returns to risk holding Italian debt.
They dipped to 4.84 per cent in Wednesday trading on the secondary market.