Italian Bond Yields Weigh on European Markets

Today’s much anticipated long term Italian bond sale went smoothly, yields dropped slightly under the 7. % range but just slightly declining to 6.98%. The benchmark has been set at the 7% level, where countries need to seek bailout assistance.

Italian short term bonds sold yesterday at a much lower rate dipping between 3-4% for the 6 month investment. These rates were mostly thought to reflect the support of the ECB and the IMF over the short term.

Italy’s cost of borrowing fell slightly but the Italian Treasury only managed to sell EUR7.017 billion out of a maximum EUR8.5 billion, disappointing some market participants who had hoped for a repeat performance of yesterday’s super-successful short-term debt auction, where six-month borrowing costs were halved.

Italy paid a yield of 6.98% on the March 2022 bond, down from 7.56% previously and compared to 7.05% in the secondary market prior to the auction result.

Earlier in the session, data from the European Central Bank showed the rate of growth of money supply in the euro zone dropped in November despite the central bank’s efforts to pump liquidity into the currency bloc’s struggling banking sector. Private sector lending growth also slowed last month, pointing to further ECB monetary easing up ahead.

EU markets shed earlier gains on today after mixed results from the auction of Italian longer-dated government bonds. Yields on three and 10-year debt fell as Italy sold €7.017 billion ($9.07 billion) in the auction, against a top aim of €8.5 billion. This is the worry that the markets are facing. Italy needs to refinance a huge debt in the first quarter of 2012, the question is will they be able to raise the funds they need to refinance.

The Stoxx Europe 600 index moved to flat at 240.28, along with the French CAC 40 index which traded at 3,072.30. The German DAX 30 index pared its lead back to a rise of 0.3% to 5,786.91. The FTSE 100 index rose 0.2% to 5,518.45.

A single auction doesn’t solve the overarching problems of the sovereign-debt crisis. We still need to get to the single plan of how you manage the euro, and the EU economic problems. We know what has to happen. A smaller number of consenting members who participate in discipline of the euro and the rest have to find a more elegant method of default. The question is how long do European Leaders have, the markets have been waiting for months and the 1^st quarter of 2012 is doomsday.