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Spanish Bond Yields Rise to 7% Before Crisis Summit

Italy Pays Most Since December To Sell 5.4 Billion Euros of Debt
National flags of Italy hang above stalls at an indoor market in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Italy paid the most to sell 10-year debt since December as European Union leaders began a summit today that aims to produce a lasting solution to the euro-region debt crisis that has been driving up borrowing costs.

Italy sold 5.42 billion euros ($6.74 billion) of five- and 10-year bonds, near the maximum 5.5 billion-euro target for the sale. The Treasury priced the 10-year debt to yield 6.19 percent, up from 6.03 percent on May 30. The Treasury priced its five-year bond to yield 5.84 percent, compared with 5.66 percent last month.

“Today’s sale was all about the EU summit,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mail. “Sentiment-wise, this was not so much an auction of Italian paper as a sale of euro-zone debt that happened to be issued by the Italian sovereign. The results have very little to do with Italian fundamentals. The ever-larger concessions stem from market fears that Italy may follow in Spain’s footsteps.”

Monti is facing growing pressure from the parties supporting his unelected government to convince Merkel to reverse her opposition to collective debt sales and other measures aimed at bringing down borrowing costs. The yield on Italy’s 10-year bond has jumped more than 50 basis points since Spain requested a bailout on June 9 on fears Italy may be next. Merkel has so far shut the door to joint euro-area bonds, which she said yesterday were the “wrong way” to achieve the greater European integration needed to stem the debt crisis.

Bond Decline

The yield on Italy’s 10-year bond rose 5 basis points to 6.251 percent, the highest in two weeks, leaving the yield difference with comparable German debt at 476 basis points.

Monti says that the deepening crisis is fueling a growing backlash against the euro.

“If the public opinion sees that bad signals, not good signals are coming back from the markets, well then people may be discouraged and political forces which say let European integration, let the euro, let this or that country go to hell might prevail,” he said last night in Brussels before the start of the meeting.

EU Plan

The EU leaders are due to discuss a plan seen playing out over more than a decade for closer European integration. The blueprint, written by EU President Herman Van Rompuy, centers on common banking supervision and deposit insurance, along with a “criteria-based and phased” move toward joint debt issuance. The blueprint also suggests that the EU could impose upper limits on annual budgets and debt levels of nations that use the euro.

“The EU summit is likely to take steps to outline a long-term road map but fail to deliver a quick-fix to stabilize financial markets,” Jamie Searle, a fixed-income strategist at Citigroup Inc. in London, wrote in a note before the auction. Italian bond “yields are likely to remain under pressure following the summit, not helped by rising domestic political tension and ratings pressure.”

The summit comes after Cyprus this week became the fifth euro-area country to ask for help from the 17-nation region’s firewall, following rescues of Greece, Ireland, Portugal and Spain’s request for funds to shore up its banks.

Market turmoil is weighing on Italy, which is mired in its fourth recession since 2001 and needs to sell an average of 35 billion euros of debt a month to finance Europe’s second-biggest debt. Demand today may have been helped by a 17 billion-euro bond redemption due July 1 that may have prompted some buying as banks looked to rollover their Italian debt holdings.

At today’s auction investors bid for 1.28 times the amount of 10-year debt offered, down from 1.40 times last month. Bids for the five-year debt reached 1.54 times the amount offered, up from the 1.35 times on May 30.

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