Italian bond yields hit new high

ITALY’S WOES on the bond markets continued yesterday, with Italian 10-year bond yields hitting euro-era highs of 6.77 per cent as the survival of Italy’s government remained on a knife-edge.

Having risen in morning trading, the yield on 10-year bond yields dropped to 6.59, amid expectation that prime minister Silvio Berlusconi might lose yesterday’s key budgetary vote.

However, the result, which saw Mr Berlusconi win the budget vote, despite receiving the support of less than half of MPs, pushed the bond yields back up by 18 basis points, reflecting market doubts about Italy’s ability to enact austerity measures under his leadership.

Speculation that LCH Clearnet, Europe’s largest clearing house, could raise the margin it charges on Italian debt, also spooked investors.

Last November LCH Clearnet increased the margin requirements for customers trading Irish Government bonds, in the days preceding the IMF-EU bailout.

Italy’s 10-year bond yield stood at 6.77 per cent at 5pm in London, the most since the introduction of the 17-member currency in 1999. The difference in yield, or spread, over similar-maturity German securities widened to a record 497 basis points.

The cost of shorter-term Italian debt also continued to climb yesterday. The Italian two-year note yield climbed 32 basis points to 6.37 per cent. It earlier climbed to as much as 6.44 per cent.

Also weighing on markets were comments from the ECB’s European Central Bank council member and Bundesbank president, Jens Weidmann, who said in a speech in Berlin that the ECB could not bail out governments by printing money.

The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.

There was some respite on the equity markets which appeared to take solace in the passing of the budgetary vote, though much of the gains reflected strong corporate results. France’s CAC advanced 1.5 per cent, Germany’s DAX Index rose 0.7 per cent, while in London the FTSE added 1.2 per cent. Volumes remained low according to traders.

In Dublin, the Iseq closed up 0.8 per cent, with most activity centred on domestic issues, after CRH announced it was moving its main listing to London.