Eurozone bond rates ease sharply, Italian yield below 6%

5th December 2011, Comments 0 comments

Tensions eased sharply on European bond markets on Monday after Italy announced tough new austerity measures and German and French leaders proposed a new treaty to tighten eurozone budget discipline.

Italy's long-term borrowing rate fell back below the key 6.0 percent threshold, and rates also dropped on Spanish and French bonds throughout the day, although they rose for Ireland.

Sentiment was lifted after French President Nicolas Sarkozy and German Chancellor Angela Merkel said they wanted a new EU treaty to tighten budget discipline.

They called for automatic sanctions for countries whose deficits exceed the EU limit of 3.0 percent of GDP and for a new EU treaty to tighten controls on spending, ahead of a crucial EU summit in Brussels at the end of the week.

In Italy, confidence had already risen after the cabinet gave its go-ahead to a crisis-busting plan on Sunday estimating that it would save 20 billion euros ($27 billion).

The rate of return on Italian government 10-year bonds on Monday fell to 5.983 percent, dropping below 6.0 percent for the first time since the end of October.

Experts consider borrowing rates above 6.0 percent to be unsustainable in the long term for countries with slow growth and low inflation.

A week ago Italy made a new issue which went badly with the rate of return on 10-year bonds shooting above 7.0 percent, and the yield curve inverted signalling strong sentiment that the country could default in the near future.

The easing of tension on the secondary market on Monday sent a signal that this outlook has receded in the light of the government's latest action, the third austerity package in recent months.

The yield on 10-year Spanish bonds also fell to 5.071 percent at 1530 GMT against 5.626 percent on Friday.

France's 10-year borrowing cost dropped to 3.136 percent from 3.253 percent at the end of last week, with the difference between its and Germany's borrowing cost dropping back under 1.0 percentage points.

Benefitting from less safe-haven sentiment, the yield on 10-year German bonds rose to 2.210 percent from 2.131 percent Friday.

Agence France Tresor, which handles government debt, said separately that it had raised 7.506 billion euros by issuing new short-term treasury bills, with borrowing costs falling.

The falls came at the start of a week seen as as critical for the eurozone.

Tensions on the eurozone bond market had already eased at the end of last week on rising sentiment that Germany and France are coming close to a new strategy for a solution to the eurozone debt crisis.

This was partly because the European Central Bank hinted that if governments provided cast-iron guarantees that they will exercise budget discipline, then the central bank might have extra room for policy manoeuvre.

Germany and France, whose leaders met in Paris on Monday, have outlined plans for deeper fiscal integration in the 17-member eurozone, which would include more space for intervention in weaker economies.

© 2011 AFP

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