Bloomberg News

Italian Yields Reach 7%, French Debt Slides as Bond Rout Deepens

November 16, 2011

Nov. 15 (Bloomberg) -- Italian bonds led a slump in euro- area government debt as investors abandoned all but the safest assets amid rising borrowing costs at auctions and concern the region’s financial woes are deepening.

“It’s a confidence crisis,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht, Netherlands. “Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering.”

German two-year rates dropped below 0.3 percent for the first time, while the extra yield investors demand to hold 10- year bonds from France, Belgium, Spain and Austria instead of bunds all climbed to euro-era records. Italy’s 10-year yield rose above 7 percent as prime minister-in-waiting Mario Monti wrapped up talks on forming a new government. Spain and Belgium sold less than the maximum target of bills at auctions today as financing costs increased.

Italy’s 10-year yield climbed 37 basis points, or 0.37 percentage point, to 7.07 percent at 5 p.m. in London. It rose to a euro-era record 7.48 percent on Nov. 9. The 4.75 percent bond due September 2021 slid 2.285, or 22.85 euros per 1,000- euro face amount ($1,351), to 84.57.

The spread investors demand to hold 10-year French debt instead of German bunds widened 26 basis points, the most since the euro started in 1999, based on closing-market rates, to 190 basis points. It touched 191 basis points, also the most since the common currency was introduced. The yield on the 10-year bund fell one basis point to 1.77 percent, less than half France’s 3.67 percent rate.

Stocks Slide

The Stoxx Europe 600 Index of equities fell 0.6 percent and the euro weakened 0.9 percent to $1.3508. Italian, Spanish, Belgian and French credit-default swaps surged to records.

Banks and investors are reducing holdings of European government bonds amid concern the region’s leaders aren’t doing enough to counter the two-year-old debt crisis. Kokusai Asset Management Co.’s Global Sovereign Open, Japan’s biggest mutual fund, sold its entire holdings of Italian government bonds by Nov. 10, a weekly report from the fund showed. BNP Paribas SA and Commerzbank AG said in earnings reports this month they’re unloading sovereign bonds at a loss.

Italian debt slid today even as the European Central Bank was said by two people with knowledge of the transactions to have bought the securities. A spokesman for the central bank in Frankfurt declined to comment.

‘Cut Rates Now’

The ECB needs to “cut rates, now, and do something serious about helping governments, or the euro project is over,” Soeren Moerch, head of government-bond trading at Danske Bank A/S in Copenhagen, wrote in a note to clients today.

The central bank lowered its key interest rate a quarter point to 1.25 percent on Nov. 3. It raised borrowing costs by the same amount twice this year from a record-low 1 percent.

Two-year yields in Italy, Europe’s biggest bond market, surged 49 basis points to 6.48 percent as Monti sought to form a Cabinet amid concern he would be unable to restore investor confidence. President Giorgio Napolitano offered him the post on Nov. 13, a day after Silvio Berlusconi resigned.

The increase in 10-year yields to more than 7 percent risks making it too expensive for Italy to borrow in the market. Ireland began talks to receive aid in November last year, three weeks after its 10-year yield breached 7 percent. Portugal asked for help in April, three months after its borrowing costs jumped past that level. Greek yields also breached 7 percent before it gained aid in April 2010.

‘There’s Fear’

Dutch Prime Minister Mark Rutte called for the possibility of euro members to be expelled from the currency group, a day after German Chancellor Angela Merkel’s Christian Democratic Union party voted to allow euro states to quit the bloc. “We would like countries to be able to be pushed out of the euro zone,” Rutte said at a news conference in London, adding this would be a last resort.

“At this stage there’s fear,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “You have the same disbelief about Italian politics and that’s apparent in Italian spreads widening today. Spain is following.”

Ten-year Spanish yields climbed 23 basis points to 6.34 percent. The extra yield, or spread, over similar-maturity bunds surged to a euro-era record of as much as 458 basis points from 171 basis points on April 12.

Spanish Sale

Spain sold 3.16 billion euros of 12- and 18-month bills today, less than its maximum target of 3.5 billion euros. The average yield on the 12-month securities climbed to 5.022 percent from 3.608 percent at the previous sale on Oct. 18.

Spain plans to auction a maximum 4 billion euros of bonds due in 2022 in two days, the same day France sells as much as 7 billion euros of notes and up to 1.2 billion euros of inflation- linked debt.

Belgium auctioned 2.73 billion euros of bills today, less than the 3.2 billion euros it planned to raise, and paid the highest yield in three years on one-year securities.

The Belgian-German 10-year yield spread surged 32 basis points to 313 basis points after reaching 318 basis points, the most since the euro was introduced. The extra yield investors demand to hold 10-year Austrian bonds reached an all-time high 192 basis points.

Derivative Bets

Derivative traders are betting the willingness of U.S. and European banks to lend will wane as financial institutions shore up their balance sheets.

The spread between the dollar London interbank offered rate and the overnight index swap rate projected by contracts trading in the forward market rose to 62 basis points, the most since May 2010, according to UBS AG data. The FRA/OIS spread for the March to June 2012 period projects a widening of more than 24 basis points from the current spot dollar Libor-OIS spread, an indirect measure of the availability of funds in the money market and of banks’ willingness to lend.

Banks borrowed the most from the ECB since June 2009 in a seven-day refinancing operation today. The central bank allotted 230.3 billion euros to 161 bidders, up from 194.8 billion euros and 150 bidders last week.

“The market is seizing up,” said Marc Ostwald, a fixed- income strategist at Monument Securities Ltd. in London.

Credit-default swaps on Italy jumped 27 basis points to 589 and Spain climbed 23 to a record 480, according to CMA prices. France rose 19 basis points to 233 and Belgium increased 21 basis points to 344. An increase signals worsening perceptions of credit quality.

Confidence Falls

German two-year yields fell to 0.295 percent, the least on record. A report from the ZEW Center for European Economic Research showed German investor confidence dropped to a three- year low in November. The Federal Statistics Office said economic growth accelerated last quarter.

Greece sold 1.3 billion euros of 91-day bills at 4.63 percent, up from 4.61 percent at the previous offering.

Italian bonds have lost 8.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Bunds have returned 9.1 percent and Spanish securities have made 0.2 percent, the indexes show.

Volatility on Finnish and Dutch debt was among the highest of developed nations today, according to measures of 10-year bonds, two-10-year spreads, and credit-default swaps.

“Today we’ve seen probably the most worrying day of this crisis so far,” Michael Riddell, a London-based fund manager at M&G Investments, which oversees about $323 billion of assets, wrote on his company’s web-based blog. “Even the Netherlands, which the market perceives to be the second strongest euro zone sovereign, is coming under a bit of pressure.”

--With assistance from David Goodman in London. Editors: Daniel Tilles, Nicholas Reynolds

To contact the reporter on this story: Paul Dobson in London at

To contact the editor responsible for this story: Daniel Tilles at

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