All eyes on Italy. After paying sharply higher yields to sell one-year paper on Wednesday, it faces the altogether trickier task of selling up to five billion euros of three-year bonds. Yields are expected to jump by a full percentage point from a month ago but, as with yesterday, demand will be there and the paper should get away.
German Bunds have opened flat and European stocks are set to edge up so the recent rush for the exits has at least temporarily abated.
After yesterday’s auction result, Italian officials were quick to point the finger at “external factors” – code for Spain. That prompted Spain’s Mariano Rajoy to hit back, demanding European leaders choose their language with more care. The message from Madrid is that the government is doing everything asked of it on the austerity and structural reform front and needs stronger backing from its peers. It’s hard to argue with that. Italian premier Mario Monti has said similar about Italy. The difference is that he did not renege on an agreed deficit target without consulting Brussels.
Are the Italian’s right? Are they merely being caught in the backwash of pressure on Spanish borrowing costs since Rajoy ripped up Madrid’s 2012 deficit target or is the market starting to doubt Rome’s reform resolve too?
It looks like largely the former with a dash of the latter for now. Certainly, Monti’s flagship labour reforms are slower to come to fruition than hoped and there is a danger of further dilution of the measures. The yield premium Italian 10-year bonds pay over German Bunds rose above 400 basis points this week for the first time since early February.