2012.05.28 13:45:58 UPDATE: Solid Italian CTZ, BTPei Auctions; Sterner Tests Lie Ahead

-- Italian Treasury raises maximum amount at auction -- Borrowing costs rise as investors demand higher returns -- Spanish banking woes weigh on the market -- Market now waits for longer-dated Italian supply on Wednesday (Adds analyst comment, rewrites throughout.) By Nick Cawley Of DOW JONES NEWSWIRES LONDON (Dow Jones)--The Italian Treasury raised the maximum targeted amount at auction Monday, selling slightly in excess of EUR4.25 billion of zero-coupon and inflation-linked bonds. While demand was good, highlighted by strong bid-to-cover ratios, borrowing costs continue to rise as the economic and political crisis blighting the euro zone shows no sign of abating. "Monday's auction went well, demand was strong and the Italian Treasury was able to raise their maximum amount," noted interest rate analyst Giueseppe Maraffino at Barclays. "The pre-auction price concession helped, while the pricing was also affected by the high volatility in the market," he added. The demand for Italian debt at Monday's auction was even more impressive as large parts of Europe, including Germany, were closed due to the Whit Monday bank holiday. This continued demand for paper, in the light of market closures, adds credence to the ongoing belief that Italian auctions are primarily being supported by domestic accounts, using cheap loans from the two European Central Bank liquidity operations when around EUR1 trillion of cash was injected into the market. Holiday-thinned peripheral markets were rattled earlier in the day by news that shares in Bankia SA tumbled 27% when they resumed trade Monday as the markets digested news of their EUR19 billion Spanish government bailout announced late Friday. While most peripheral markets, apart from Spain, regained their earlier losses, markets remain on a knife-edge, waiting for the next political or economic shock. Italy will face a sterner test on Wednesday when it returns to the debt market looking to sell up to EUR3.5 billion of five-year paper and a maximum scheduled EUR2.75 billion of the current 10-year benchmark. The Italian five-year currently yields 5.12%, a multi-month high, while the 10-year is quoted at 5.82%, a worringly high yield but off the spike high of 7.40% seen in late November last year, according to data from Tradeweb. The Dipartimento Del Tesoro sold EUR3.5 billion of a new CTZ May 2014 at a yield of 4.037%, and received bids of just EUR5.8 billion. The Treasury also sold two small tranches of inflation-linked bonds garnering strong bid-to-cover ratios. EUR418 million of September 2016 BTPeis were sold at a yield of 4.39% with a b/c of 2.3 and EUR333 million of September 2017 BTPeis were sold at a uniform yield of 4.60% and with a b/c of 2.64. -By Nick Cawley, Dow Jones Newswires; 44-20-7842-9374; nick.cawley@dowjones.com (END) Dow Jones Newswires May 28, 2012 07:45 ET (11:45 GMT)