November 9, 2011 / 1:46 PM / 8 years ago

EURO GOVT-Febrile markets send Italian yields through roof

* Italian 10-year yields hit euro era high of 7.5 pct
    * LCH.Clearnet SA. margin increase on Italian debt hits BTPs
    * Yield curve inverts, reflecting repayment nerves

    By Marius Zaharia and Neal Armstrong	
    LONDON, Nov 9 (Reuters) - Italian 10-year bond yields surged
past the 7 percent level widely viewed as unsustainable on
Wednesday as Prime Minister Silvio Berlusconi's promise to
resign failed to spur hopes the country can deliver on
long-promised economic reforms.	
    Yields soared to euro era highs of 7.502 percent amid an
investor exodus sparked by a move by clearing house LCH.Clearnet
SA to increase the margin call on Italian debt 
that carried unwelcome echoes of the run-up to the euro zone's
sovereign bailouts.	
    The European Central Bank responded by "aggressively" buying
Italian debt, one trader said, narrowing the yield by around 20
basis points.	
    Italy has been the focus of market anxiety in recent days,
with investors increasingly worried that political turmoil is
hindering efforts to stop the third biggest euro zone country
becoming engulfed by the region's debt crisis.	
    A 7 percent yield was seen by many in markets as a line in
the sand, given that Portugal and Ireland were forced to seek
bailout after yields on their bonds exceeded that level.	
    The cost of insuring Italian debt against default rose 20
bps on the day to 543 bps.	
    The spread between Italian and safe-haven German 10-year
bonds rose to 576 bps, exceeding 500 bps for the first time as  
  German December Bund futures were last 82 ticks up on
the day at 138.84. Traders said the contract high at 139.19 hit
in September was in the market's sights. 	
    "Unfortunately the Italian bond market is the biggest victim
of this political football that's being kicked around the euro
zone at the moment," said Sean Maloney, rates strategist at
    "If this carries on then the ECB may well be forced to
intervene more aggressively (with bond buying). It's an illiquid
market and they have the firepower to turn things around."	
    The ECB, which has been buying Italian bonds in the
secondary market since August to keep yields down, has said its
bond purchases are conditional on Italy pursuing reforms.     
    Short-term Italian yields rose even more, with the yield on
two-year bonds rising above those on 10-year debt also for the
first time since the launch of the euro -- a clear signal of
investors' rising concern they may not get their money back.	
    "You're looking at bid/offer spreads in Italian BTP's of 2,
3 and 4 points wide and not in big size. It's getting fairly
untradable," said a trader.  	
    Italy's debt is equivalent to 120 percent of economic output
and it is deemed too big to be bailed out with current 
    Worries that the debt crisis could be infiltrating the core
of the euro zone were reflected in the spread of 10-year French
government bonds over their German equivalent blowing out to a
euro era high around 140 basis points. 
    Italian premier Berlusconi was seen by many as an obstacle
in the way of structural reforms and the sell-off in Italian
bonds accelerated earlier this year when he hesitated to pass
the austerity steps proposed by his finance minister. 	
    But even when Berlusconi goes, many market players see no
guarantee that reforms to cut debt and boost growth will be
quickly implemented.	
    Questions also remained on issues such as whether the
European Financial Stability Facility (EFSF) bailout fund will
have enough power to fight contagion and whether euro zone
policymakers are willing to take further steps against the
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