But the lowest six-month auction yield and strongest bid-to-cover ratio since September added to a sense that some of the tension around the countries now at the centre of Europe's debt problems had eased for a moment. European stocks rose and the euro edged up in response.
"This is the first piece of good news for Italy's bond market since the crisis erupted (for Rome) in July," said Nicholas Spiro of Spiro Sovereign Strategy. "While today's auction was supposed to be the less challenging of this week's two sales given the shorter maturity of the debt on offer and the predominantly domestic buyer base, it's still a success."
Italy paid an average rate of 3.25 percent to sell 9 billion euros of six-month BOT bills, down from a euro lifetime record of 6.50 percent just a month earlier. It also sold 1.7 billion euros of 24-month, zero-coupon bonds at a yield of 4.85 percent, down from 7.8 percent a month ago. Since then the ECB has flooded euro zone banks with almost 500 billion euros of longer-term liquidity and the Rome government has overcome internal opposition to a radical pension reform as part of Italy's third budget package since the summer.
Spain's six-month debt costs also more than halved to 2.4 percent at an auction on the eve of the ECB's bumper tender for three-year money on December 21. "Many things have changed from a month ago," an Italian bill trader said. "This doesn't mean we can rule out further problematic auctions. Markets are easily unnerved."
Doubts about how much of the ECB money would find its way to troubled government bonds have weighed on Italian and Spanish yields and investors are mindful that Rome must refinance some 91 billion euros in bonds in the first four months of next year.
Italian ten-year yields briefly climbed back above 7 percent this week, pushing the premium over the equivalent German benchmark above 500 basis points . On Wednesday, the yield was just above 6.8 percent and the premium around 489 basis points over Germany.
While Rome can count on healthy appetite from domestic retail investors for short-term bonds and bills, longer-term debt sales are a better measure of underlying interest from external buyers. "Demand for short term paper is good. It remains to be seen whether this extends to the longer maturities," said Credit Agricole strategist Peter Chatwell.
Italy paid a euro lifetime record high yield of 7.56 percent to sell ten-year bonds at the end of November. Traders say that the ECB targets maturities only up to 10-years in its bond buying programme, further limiting the appeal of longer term Italian issues for primary dealers.
Standard & Poor's - which is expected to release its eagerly awaited verdict on debt ratings for 15 eurozone countries in January - has warned the first quarter of next year will be "tough", especially for Italy. In a push to regain market confidence, Italy's parliament gave the final seal in the run-up to Christmas to an emergency austerity budget rushed through by a new technocrat government.
Market attention has now turned to the reform agenda of Prime Minister Mario Monti who has promised to tackle Italy's chronic low-growth problems - after inaction by former PM Silvio Berlusconi pushed the country to the brink of financial disaster. "Italy needs some breathing space to implement its reforms. Yet market pressures are set to intensify in the coming weeks given the large amount of debt falling due in the first quarter alone," Spiro said. Monti has convened a cabinet meeting on Wednesday to outline his plans and he could provide some indications to investors in his traditional year-end press conference on Thursday.
Analysts expect Monti's 33 billion euro austerity package to further harm Italy's weak internal demand, making efforts to revive growth through a series of long-delayed liberalisations even more crucial. Totalling more than 15 billion euros, demand for the BOT bills equalled nearly 1.7 times the amount of offer and was also much larger than BOT redemptions totalling 8.8 billion euros.