Italian borrowing costs fell at an auction hours after Moody'sInvestors Service downgraded the country's bond rating by twolevels, citing the worsening political and economic outlook.

Italy sold 3.5 billion euros ($4.3 billion) of three-year bonds,matching a maximum target, and later sold 1.75 billion euros ofthree longer-dated securities. The Rome-based Treasury sold the2015 bond at 4.65 percent, down from the 5.3 percent on asimilar-maturity bond sold on June 14. Investors bid for 1.73 timesthe amount offered, up from 1.59 times last month.

“The cut to Italy's credit rating had been more or less pricedin,” Nicholas Spiro, managing director of Spiro Sovereign Strategy,a London-based firm specializing in sovereign-credit risk, said ina note. “Domestic banks continue to hold the fort at Italianauctions. The concession, however, is still hefty and reflects theincreasing risks in Italy.”