Italy's borrowing costs jump amid new uncertainty, growth prospects across Europe

ROME – Italy’s borrowing costs more than doubled in a pair of bond auctions Wednesday due to renewed market uncertainty about debt and growth prospects among the 17-nation eurozone’s weakest members.

Italy easily sold €8 billion ($10.5 billion) in 12-month bonds on Wednesday, but the interest rate investors demanded rose to 2.84 per cent from 1.40 per cent last month. The government also sold €3 billion in three-month bonds, with the borrowing costs rising to 1.25 per cent from 0.49 per cent.

The borrowing rates of Italy and other financially shaky countries like Spain had eased in recent months after the European Central Bank gave banks emergency loans and the technical government of Mario Monti implemented austerity measures.

But uncertainty has returned to Europe, pushing borrowing rates higher, particularly Spain, which saw its 10-year bond yield hit four-month highs over 5.90 per cent.

In the secondary market, where issued bonds are traded openly, Italy’s 10-year bond yield was at 5.55 per cent, down from yesterday’s high of 5.70 per cent but still far above last week’s 5.0 per cent.

Analysts noted that demand remained strong for both bond offers and that, in general, investor interest has been healthy at Italian auctions. The question is whether this week’s market jitters continue.

“If the increase in yields we are observing is a temporary correction, it should not impact significantly on the average cost of funding for Italy for this year,” Chiara Cremonesi, a fixed-income strategist at UniCredit, said in a note.

While Monti is “attentively” following news of the higher bond yields, the premier has no comment on what is causing them, his office said in a statement.