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Italian Yields Reach 9-Year High as Crisis Spreads; Bunds Gain

July 8 (Bloomberg) -- Italian bonds slid for the fifth straight day, driving yields to a nine-year high, as contagion from Greece’s fiscal crisis intensified in the region’s biggest government-debt market.

German 10-year yields fell the most since April after U.S. employers added less than a fifth of the workers economists estimated in June. The yield on 10-year Italian securities jumped to a euro-era record over German bunds as data showed industrial production in the Mediterranean nation dropped while Italian bank stocks fell, paced by UniCredit SpA. A European Union document said governments should be ready to help banks that fail stress tests as a last resort. Spanish, Irish and Greek bonds also fell.

“If you are talking about a default in Greece where contagion spreads through Ireland, Portugal and Spain, then Italy is the next stop,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “Italy has an awful lot of debt.”

The yield on 10-year Italian bonds rose 10 basis points to 5.27 percent at 5:03 p.m. in London, up from 4.87 percent a week ago. The yield reached 5.38 percent, the highest since June 2002. The 4.75 percent securities due in September 2021 fell 0.715, or 7.15 euros per 1,000-euro ($1,424) face amount, to 96.455.

Italy’s two-year note yield jumped as much as 29 basis points to 3.61 percent, the most since November 2008. Credit-default swaps on Italy rose 23.5 basis points to 241, the highest level since Jan. 11, according to CMA.

Widening Spreads

Italian industrial output declined 0.6 percent in May from April, when it rose 1.1 percent, the Rome-based statistics office Istat said today. Economists had forecast a 0.1 percent decrease, according to the median of 22 estimates in a Bloomberg News survey.

Italy’s Finance Ministry yesterday said new measures aimed at balancing the budget will total 40 billion euros, with most of the cuts in the four-year plan scheduled for 2013 and 2014. Finance Minister Giulio Tremonti said today he moved out of a Rome apartment provided by Marco Milanese, a former aide and member of Parliament whose arrest is sought by prosecutors in Naples. He had a “long and cordial working lunch” with Prime Minister Silvio Berlusconi, the leader’s office said.

The nation is the euro area’s biggest bond market, with 1.8 trillion euros of outstanding debt as of Dec. 31, compared with 1.1 trillion euros of German debt outstanding on March 31, according to websites from the nations’ debt agencies.

‘Pesky Vigilantes’

The difference in yield, or spread, between German and Italian 10-year debt touched 247 basis points, headed for its biggest weekly increase since at least January 2010. The difference in the price of Italian and German bond futures widened to a record as the Italian securities fell 0.8 percent to 104.57. The yield spread between Italian and Spanish 10-year bonds narrowed to 42 basis points, the least since March.

“The reality now is that those pesky bond vigilantes have caught sight of Italy, and that is basically all that matters,” Michael Riddell, a London-based fund manager at M&G Investments, said in his blog on the company’s website. “Rising sovereign and bank borrowing costs will lead to credit-rating downgrades. In other words, credit ratings partly get cut because the bond prices fall.”

The Bloomberg Europe Banks and Financial Services Index was down 2.3 percent. UniCredit dropped as much as 8.8 percent, while Bank of Italy Governor Mario Draghi said he’s certain that the country’s lenders will pass European stress tests.

Stress Tests

Banks that fail this year’s round of EU stress tests may need to present plans for making up their capital shortfall by the end of September, according to an internal EU document. They may be given a further three months to implement these plans and raise the additional capital they need, according to the preliminary document obtained by Bloomberg News.

German bund yields fell 14 basis points, the biggest drop since April 18, to 2.83 percent, outperforming French, Belgian, Dutch, Austrian and Finnish securities of similar maturity. The German securities extended their advance after a report showed U.S. employers added 18,000 workers last month, less than the 105,000 forecast and the fewest in nine months, while the unemployment rate unexpectedly climbed.

‘Flight to Quality’

“We are seeing some flight to quality, and peripherals remain under pressure, particularly Spain and Italy,” said Michael Leister, a fixed-income analyst at WestLB AG in London. “The general mood towards Portugal and Greece, together with the need for significant structural reforms and more austerity in Italy and Spain, is creating the perfect storm. Spreads will continue to widen.”

Spanish 10-year yields rose four basis points to 5.66 percent. Yields on similar-maturity Irish bonds increased 20 basis points to 12.92 percent. Greek 10-year yields jumped 17 basis points to 16.86 percent, and the nation’s two-year note yields touched an all-time high 30.40 percent. Irish two-year note yields reached a record 16.74 percent.

Portuguese 10-year bonds rose, pushing the yield down nine basis points to 12.82 percent.

European officials remain at loggerheads over the best way to handle Greece’s debt crisis. Moody’s Investors Service cut Portugal’s credit to junk this week. Discussions over how to include private investors in a second bailout for Greece are ongoing as borrowing costs at other nations’ debt sales rise.

Dutch Finance Minister Jan Kees de Jager said private investors may have to be forced into contributing to the new Greek aid package, according to an interview yesterday in Dutch newspaper Het Financieele Dagblad.

German government bonds handed investors 0.5 percent this year, compared with a 2.5 percent return for U.S. Treasuries and 2.3 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds have lost 17 percent, the indexes show.

To contact the reporters on this story: Emma Charlton in London at; Paul Dobson in London at

To contact the editor responsible for this story: Daniel Tilles at

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