AZIMUT HOLDING S.P.A. 
By Cash-rich retail investors and Italian banks have become increasingly important as the main buyers of domestic government bonds after foreign investors slashed their exposure to Italian debt in the midst of the euro zone crisis.
Italian fund managers said U.S. investors were once again heavy sellers of Italian securities in the days following a Spanish bank bailout, amid concerns of contagion.
But these outflows stopped once Prime Minister Mario Monti raised the prospect of asset sales to help cut debt.
While there is no sign in Italy of the deposit drain that is plaguing crisis-hit Greece and to a certain extent Spain, some Italian investors are looking to buy non-European currencies to counterbalance their heavy exposure to the euro and Italy.
"Italian clients thought last year's panic was exaggerated and that problems were going to be limited to a few peripheral countries like Greece, Portugal and Ireland," said Daniele Beltrame, Chief Investment Officer at bank Credito Valtellinese.
"But the seriousness of Spanish banks' problems is making them nervous and some are asking for diversification into foreign currencies."
Investments denominated in dollars, Swiss francs and British pounds emerged as favorites, fund managers said. But investors were also asking for currencies with a strong correlation to commodities such as the New Zealand and Australian dollar.
Yet, nearly all of these currencies have risen considerably since the euro zone crisis first intensified in the final part of last year, leaving little room for upside.
"We are seeing early signs of some clients moving into dollars, Swiss francs and even sterling. There has also been some move away from monetary funds but that's because yields are low," an investment adviser for retail clients at Italy's top retail bank Intesa Sanpaolo said.
Italy's three-year borrowing costs spiked to 5.3 percent on Thursday, highlighting the pressure on the euro zone's third-largest economy.
But although nervous, Italian retail investors were not yet deserting their home country's government bonds - traditionally a much-loved local alternative to investing in property - nor cutting their losses by exiting the Italian market.
"There's no panic and certainly no massive sale of funds," the Intesa adviser said.
DOMESTIC BUYERS
Italy is more than halfway through a refinancing need of 440 to 450 billion euros this year, including short-term bonds.
Rome's high-yielding government bonds and securities have become less appealing to foreign buyers, who now hold just around a third of Italy's colossal debt against more than 40 percent a year ago.
Many Italian investors, and even some senior bankers, who cheered the arrival of Monti and bold pro-liquidity measures by the European Central Bank, were taken aback by the sudden deepening of the crisis in the past week.
"Compared with October and November Italy's situation has improved from a fiscal point of view. But despite that, the perception has worsened," said Massimo Gaggiotti, head of investment at Italy-based asset manager RMJ SGR.
Data from Italian banking association ABI showed that deposits held by residents showed no sign of deterioration but actually grew by 1.5 percent in April after a 2.2 percent rise in March, the biggest increase since October 2010.
Foreign investors, on the other hand, withdrew 20 percent of their Italian deposits in March, according to the latest figures available.
Crucial for an indication of retail investors' sentiment will be bank deposit data for May, due next week, and June.
Meanwhile portfolio managers are trying to anticipate trends by calling clients before clients call them.
"I try to head off developments by going to see clients on a regular basis. At the moment they're not particularly worried," said Claudio Solignani, fund manager for Azimut. "I haven't had a single request to move investments outside Europe."
(Writing by Lisa Jucca; Editing by Rosalind Russell)
By Lisa Jucca and Stephen Jewkes
