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Bad sign for Europe rescue plan: Italian bond yields jump

October 28, 2011 | 10:40 am

Italyparliament
One day later, and markets already are having second thoughts about Europe’s plan to end its government-debt crisis.

In a particularly troubling sign, yields jumped Friday on Italian and Spanish government bonds. Those are the Eurozone countries that the rescue plan is meant to save from Greece’s fate.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund -- known as the European Financial Stability Facility -- to $1.4 trillion by leveraging it.

The fund is expected to eventually issue guarantees on bonds issued by deeply indebted countries, particularly Italy. The goal: bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But on Friday, investors failed to give Italy the benefit of the doubt as the country’s treasury sold $11.2 billion in bonds and paid more than expected. The market yield on 10-year Italian bonds surged to 6.02%, up from 5.88% on Thursday and the highest since early August.

The yield on two-year Italian bonds rocketed to 4.75% from 4.43% on Thursday, and now is the highest since 2008.

Yields also jumped on Spanish government debt. The yield on the country’s 10-year bonds rose to 5.51% after falling to 5.33% on Thursday. But the rate remained below its recent high of 5.55% reached on Monday.

Italian and Spanish yields rose despite rumors that the European Central Bank was buying the countries' debt in the open market.

European stock markets ended mostly lower Friday, but gave back little of Thursday’s rally. The French market lost 0.6% after soaring 6.3% on Thursday. Italian stocks were down 1.8% after a 5.5% jump a day earlier.

The euro slipped to $1.417 from $1.418 on Thursday.

U.S. stocks were little changed at about 10:30 a.m. PDT. The Dow Jones industrial average was up 20 points or 0.2% to 12,228. The Dow had surged 339 points, or 2.9%, on Thursday.

RELATED:

Europe plan hingest on reviving growth

Italy pledges reforms as part of debt-crisis plan

-- Tom Petruno

twitter.com/tpetruno

Photo: The Italian Parliament in Rome. Credit: Marc Hill / Bloomberg News

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