Italian Bond Yields Doubled in Latest Bond Auction

Italy paid a record 6.5% to borrow money over six-months in a bond auction on Friday where longer-term funding costs soared far above levels seen as sustainable for public finances.

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The yield on the six-month paper almost doubled compared to a month earlier, capping a week in which even a German bond auction came close to failing.

Though Italy managed to reach its target of raising 10 billion euros, weakening demand and the highest borrowing costs since joining the euro pushed Italian stocks lower and bond yields to record highs on the secondary market.

Yields on two-year BTP bonds rose to more than 8% in response, a euro-era high. It now costs more to borrow for two years than 10 on the secondary market, though borrowing costs for any term have risen above the 7% threshold that usually signals that a country is likely to need outside help.

Italy’s new technocrat government, led by Prime Minister Mario Monti, is at work on structural reforms to revive the stagnant economy, but investors are looking for more than austerity measures to stem the widening debt crisis. Many European policymakers have said that greater involvement on behalf of the European Central Bank is the only effective response at this point

Though the ECB has been buying Italian and Spanish bonds in an attempt to shore up the market, its bond-buying program has been conducted intermittently, and has never been powerful enough to provide more than short-term stability.

New Bank of Italy Governor Ignazio Visco said short-term measures to cut Italy’s budget deficit would not be enough to solve the country’s economic problems. Visco said only structural reforms would be able to generate growth.

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Now record high yields threaten Rome’s planned gross issuance of 440 billion euros for 2012 as interest payments on the country’s 1.9 trillion-euro debt pile rise. At current yield levels, Italy faces losing market access as redemptions totaling 150 billion euros for the February-April period approach.