MILAN - The strong orders for Italy's new bond reserved for retail investors offered welcome relief for the Treasury on Friday after a rising budget deficit had forced it to hike its debt issuance for the last part of the year.

Total demand for the five-year BTP Valore reached 17.2 billion euros ($18.05 billion), slightly below the record debut in June for a similar note due in 2027.

Rome was forced last week to increase its gross issuance needs for the fourth quarter of the year due to higher budget deficit and lower growth forecasts for 2023 and 2024.

The gap between Italian and German bond yields rose to 208 basis points on Friday, the widest since early January, with European Central Bank policymaker Klaas Knot saying markets were exerting "discipline" on Italy.

Against this backdrop the strong demand from retail investors comes as a balm for Rome's cash-strapped coffers.

"I think this week's issuance goes a long way to help Italy fund itself in the fourth quarter," said Fabio Balboni, senior economist at HSBC in London.

"In particular it helps the government increase its cash balances, which are key for it to be able to reduce debt this year by drawing them down," he added.

Economy Minister Giancarlo Giorgetti said Italian savers had rewarded the government for its "prudent and responsible" policies.

Despite Giorgetti's satisfaction, Italy remains under close scrutiny from markets and ratings agencies in the wake of its deficit hikes.

From mid-October to mid-November, S&P Global, DBRS, Fitch and Moody's all have the euro zone's third largest economy up for review in what analysts say will be key tests for the stability of Italian bond yields.

The German-based Scope Ratings, which on Friday warned of the possible impact of the government's deficit hikes, will also review Italy's debt on Dec. 1.

The importance of small savers is growing as Italy's debt, proportionally the second largest in the euro zone after Greece's, hit a new record high of 2.85 billion euros in July.

"Clearly, retail investors will be fundamental to help Italy navigate through very large net issuance needs in 2024, which we estimate in the region of 100 billion euros," Balboni said.

Households and businesses held 11.6% of Italy's BTP bonds in June, according to Bank of Italy data, up from 7% in June 2022.

Under a 'step-up' mechanism, the BTP Valore note will offer a 4.1% coupon for the first three years and 4.5% for the last two, and an extra 0.5% loyalty bonus to those who hold it to maturity. ($1 = 0.9531 euros)

(Sara Rossi, editing by Gavin Jones)