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Thursday, July 28, 2011 11:32 AM

Italy Bonds Smacked in Selloff, Yields Now Approach Spain; Vote of "No Confidence" on Debt Plan

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Investors wasted not time in a vote of no confidence on the latest debt package supposed to save Europe. 10-year Spanish government bonds are back above 6% and yields on Italian government bonds are close behind.

Bloomberg reports Italian Bonds Decline After Borrowing Costs Rise at Nation’s Debt Sale

Italian bonds fell for a second day, increasing the yield spread over German bunds, after the nation’s borrowing costs rose at a sale of 10-year debt and Standard & Poor’s said Greece risks further defaults.

Italy’s 10-year yield surged to the most in more than a week amid speculation a probe into a former aide of Finance Minister Giulio Tremonti may force him to step down. German yields fell to near a five-month low versus their U.S. counterparts as American lawmakers pushed conflicting plans to raise the nation’s debt ceiling. Bunds rose for fifth day, the longest streak since April.

Italian Auction

Italy sold 2.7 billion euros of its 10-year benchmark security, less than the maximum target of 3 billion euros. The debt was priced to yield 5.77 percent, higher than 4.94 percent the last time the securities were sold on June 28, and drew bids for 1.38 times the securities on offer, compared with 1.33 times. In six sales of 10-year bonds this year, the average bid- to-cover ratio was 1.42 and the average yield was 4.81 percent.

“With Italy investors have recognised that the debt ratio is 120 percent” of gross domestic product, said Julian Callow, chief European economist at Barclays Capital in London. “That’s very high. Any country really above 80 ought to be getting concerned and looking at ways of bringing down that ratio. When you’re above 100, that’s flashing red signals. As well, in Italy you’ve had very weak economic growth.”

Irish bonds advanced for a third day after an S&P report said some provisions of the EU’s rescue plan would help protect Ireland and Portugal.
Italy 10-Year Government Bonds

Spain 10-Year Government Bonds

Vote of "No Confidence"

Although yields on Italian and Spanish debt are off the highs of the day, the direction is crystal clear. The proper way to look at trends of Spain and Italy is as a vote of no confidence in the latest plan, not as a vote of confidence on Finance Minister Giulio Tremonti .

Yields on Portuguese and Irish debt fell, supposedly on the belief the latest debt deal will lower borrowing costs. It won't. The S&P''s statement "some provisions of the EU’s rescue plan would help protect Ireland and Portugal" is laughable.

There is no way the EU's EFSF, the European Financial Stability Facility, can cover Spain, let alone Italy.

Mike "Mish" Shedlock
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