Italian bond yields fall, but French yields soar on S&P ‘error’

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The Eurozone’s debt crisis eased a bit on Thursday as Italian government bond yields pulled back from 14-year highs.

But markets got a new jolt as French bond yields jumped, fueled by an apparently erroneous report that Standard & Poor’s had cut France’s AAA credit rating. S&P said the report was a mistake.

European stocks were mixed. Wall Street was rebounding at midday after diving on Wednesday. The Dow Jones industrial average was up 130 points, or 1.1%, to 11,914 at about 11 a.m. PST, after plunging 389 points on Wednesday.

Italy surprised markets by attracting decent demand at its auction of $6.8 billion of one-year bills, though it paid a hefty price: a yield of 6.09%. Just a month ago, the country was paying 3.57% to borrow for one year.

The U.S. Treasury, by contrast, pays a minuscule 0.08% on one-year debt.

Fear that Italy could default on its $2.6 trillion in sovereign debt has surged in recent weeks, opening a dangerous new chapter in the 2-year-old European debt crisis.

But Thursday’s auction helped calm the markets for the moment. Traders said the European Central Bank also was an active buyer of Italian bonds, trying to suppress yields.

The yield on 10-year Italian bonds slid to 6.88% after rising early in the session to 7.40%, the highest since 1997. The jump in the yield above the 7% mark on Wednesday was one of the triggers for the day’s global rout in stocks.

Meanwhile, market yields on French bonds soared Thursday after S&P said a ‘technical error’ caused it to send an email to some subscribers ‘suggesting that France’s credit rating had been changed.’

S&P said late in the day that there was no change; it affirmed that France’s rating remains AAA.

But the damage was done: The yield on 10-year French bonds rocketed to 3.47%, up from 3.20% on Wednesday and the highest since early July.

A continuing rise in French yields could be more dangerous for Europe than the surge in Italian yields, because France and Germany are considered Europe’s strongest economies. Without them, there is no possibility of rescuing the continent’s deeply troubled states.

The French government knows it can’t afford for the bond market to turn on it. Paris announced a new round of spending cuts last week aimed at ensuring that the country holds on to its AAA rating.

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-- Tom Petruno
Twitter.com/tpetruno