Italy should manage to push through a closely watched bond sale on Monday, albeit at a record yield of around 6 percent, as the appointment of an emergency government brings some respite from market pressures that sent funding costs soaring last week.
Saddled with a towering debt, the euro zone's third-largest economy came close to financial disaster last week, when bond yields topped the 7 percent threshold that could shut it out of debt markets and in the past triggered international bailouts of Ireland and Portugal.
Italy has always been able to meet sufficient demand at its debt auctions since coming to the fore of the euro zone sovereign crisis in early July, but yields have steadily risen towards levels deemed unsustainable over the long term.
Analysts expected Monday's sale of up to 3 billion euros of a five-year BTP bond -- unusually small by Italian standards -- to go through, but the average yield is likely to rise to around 6 percent, marking a new euro lifetime high.
Five-year auction yields were 5.3 percent a month ago.
The auction is small enough in size to be fairly easily digested, especially given domestic support and ECB buying in the secondary market, Citi analyst Jamie Searle wrote in a note.
Greater challenges lie ahead for BTP auctions as Italy battles to retain market access and return funding levels to a more sustainable level, he added.
Italy pulled back from the brink after Prime Minister Silvio Berlusconi agreed to resign but analysts say huge challenges lie ahead for a technocratic government headed by former European Commissioner Mario Monti.
With a public debt totalling around 1.9 trillion euros (1.6 trillion pounds) Italy is the world's third-largest government debtor and unlike Greece, Portugal and Ireland, is seen as too big to be bailed out within the euro zone.
U.S. bank Citi noted it was the first time in two years that Italy was offering only one issue at a BTP auction, which normally totals between five billion and seven billion euros.
The yield on the September 2016 BTP soared above 7.8 percent at the worst of last week's market turmoil, and ended at 6.5 percent on Friday as the prospect of a new government and reported purchases by the European Central Bank helped Italian bonds.
The ECB, now headed by former Bank of Italy's governor Mario Draghi, started buying Italian and Spanish bonds in August in a bid to tame yield rises, a move opposed by Germany.
However, the support the ECB can offer is limited as it is not allowed to act as a lender of last resort to stably reassure investors.
To restore investors' appetite in the long run the structure of the euro zone must change, it is not just a matter of changing Italy's domestic situation, said Alessandro Tentori, a strategist at BNP Paribas in London.
Italy's Treasury has said it targets gross debt issuance of around 440 billion euros next year, roughly in line with 2011.
(Reporting by Valentina Za)