Friday. Italy’s yield curve inverted more severely, with yields at the 2-, 5- and 10-year levels soaring above 7% after the government saw short-term borrowing costs soar to unsustainable levels in a sale of six-month bills and two-year zero-coupon bonds.
Yields rise as bond prices fall.
Other peripheral and core euro-zone bond yields were also on the rise, while the cost of insuring German, French and Belgian sovereign debt against default hit record levels, according to data provider Markit.
Germany’s 10-year bond yield DE:10YR_GER -1.05% was set to end the week at 2.26%, up from around 1.96% last Friday. A poorly received sale of 10-year German bunds on Wednesday sparked a selloff in German paper.
Turmoil at the core
The turmoil at the core of the euro zone, with French, Belgian, Dutch and Austrian yields all rising, contributed to a sharp weekly fall for the euro, with the shared currencyEURUSD +0.19% changing hands at $1.3281 in recent action versus the dollar. For the week, the euro is down 1.8%.
Belgium, Italy, Spain and France are on course to issue up to 19.5 billion euros ($26 billion) in nominal and index-linked bonds next week, as well as another €9 billion to €9.5 billion in bills, estimates RBC Capital Markets.
But debt markets are likely to remain weak until European leaders show a willingness to move quickly toward fiscal union, said Elwin de Groot, fixed-income strategist at Rabobank in Utrecht, the Netherlands.
German Chancellor Angela Merkel and French President Nicolas Sarkozy on Thursday said they would propose treaty changes designed to enhance fiscal union across the euro zone ahead of a Dec. 9 summit.
Merkel also again poured cold water on proposals for jointly-issued euro bonds, warning that common interest rates across the 17-nation region would present moral hazard.
But strategists at Lloyds Bank said the likely slow pace of treaty changes — a process that could take two to three years — combined with the “intensity and ferocity” of the recent deterioration in market conditions will eventually force leaders to either allow the ECB to make unsterilized bond purchases or find a new way to increase the size of the euro-zone bailout fund.
“However, we believe that the situation will have to get much worse before either of these measures ensue,” they said.
Yields above 7%
Italy is set to sell €500 million to €750 million of index-linked bonds on Monday, but the main event will likely be Tuesday, when the nation’s Treasury plans to sell between €5 billion and €8 billion of bonds, including a new three-year benchmark, 10-year bonds and a 2020 bond, according to RBC strategists.
“The indicated range is sizeable and above our expectations,” the RBC strategists wrote. “We expect the upper end of this range to be out of reach in the current market environment.”
Yields above 7% stir worries about the ability of Italy to meet its long-term financing needs. The European Central Bank has continued to wade into secondary markets to buy Italian and Spanish debt this week, traders and strategists said, but has bee unable to prevent a sharp rise in yields.
Many strategists speculate the ECB is being somewhat less aggressive than it is capable of being in order to keep pressure on new governments in Italy and Spain to proceed with promised deficit-reduction measures and other economic steps.
Belgium on Monday is set to sell bonds, including €1 billion to €2 billion of non-benchmark 2018 bonds as well as its 10-year benchmark and other issues.
Commerzbank strategists said Belgium will likely have little choice but to bite the bullet and pay rising borrowing costs as a combination of worries about its exposure to lender Dexia SA BE:DEXB +15.09% and ongoing political turmoil helped send its 10-year yieldBE:10YR_BEL -0.47% above 5.8% this week.
RBC expects Spain to attempt to sell €3 billion to €4 billion in various bonds on Thursday, while France is set to auction up to €4.5 billion of bonds on the same day.
