Italy's bond yield hits highest level in 14 years as ECB enters market

ITALY PAID its highest yield in 14 years to sell €5 billion in 12-month debt and, while there was relief the sale went smoothly, worries remained that Italy’s borrowing costs were unsustainable.

“Investors remain in no doubt that Italy is a serious concern for the euro zone and even the global economy as a whole,” said Angus Campbell, head of sales at Capital Spreads.

During the day the ECB bought Italian bonds, according to five people familiar with the transactions, who declined to be identified because the deals are confidential. It also bought Spanish securities, two of the people said.

Although traders said the ECB had increased its bond buying, there were no signs it was set to change policy significantly.

Financial markets are increasingly looking to the ECB to try and keep Italian bonds below a key 7 per cent level through bond purchases in the secondary market.

“We’ve seen a relative calm in Italian bond markets today, but a rise back above 7 per cent on the 10-year will see the euro continue to fall,” said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.

Italian stocks made gains amid reports that the European Central Bank was buying the country’s debt, although stocks elsewhere on the Continent slipped slightly as a result of the euro crisis.

Standard and Poor’s alarmed global equity, bond, currency and commodity markets when it issued an erroneous message to subscribers suggesting France’s top credit rating had been downgraded. The euro pared gains and US equities briefly dropped after the mistaken announcement. Commodities erased gains before resuming increases after the ratings agency affirmed France’s AAA rating in a later statement.

A downgrade of France’s credit rating would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales.

US stocks, crude oil and the euro gained as concerns that the euro zone might break up eased and an Italian debt auction went better than many investors had expected, albeit at a high cost.

The benchmark Stoxx Europe 600 Index extended its decline to 1.5 per cent and French 10-year bond yields surged as much as 28 basis points to 3.48 per cent, the highest level since July.

US economic data on jobs and its trade balance was viewed as favourable.

New US claims for jobless benefits fell last week to their lowest level since early April and the trade deficit unexpectedly shrank in September, pointing to a slight improvement in the sluggish economy. – (Additional reporting: – Reuters, Bloomberg)