Italian bond yields dive, but fear still dogs Eurozone debt markets

Battered European markets got some relief Friday, as Italian bond yields tumbled from 14-year highs.

But global markets are just trading from headline to headline, and the Eurozone debt crisis is far from over. Enjoy this while it lasts.

In Italy, the yield on the 10-year government bond dived to 6.45% from 6.89% on Thursday. The yield had reached 7.25% on Wednesday, the highest since 1997, as fears mushroomed about Italy’s creditworthiness.

On Friday the Italian Senate passed an austerity budget, acceding to European Union demands. That should pave the way for embattled Prime Minister Silvio Berlusconi to resign.

The Italian stock market jumped 3.7% for the day, but remains nearly 7% below its recent high reached Oct. 27. The euro rallied 1.2% to $1.377.

Even though Italian bond yields pulled back, the 10-year yield still ended the day above its level of 6.37% a week ago, and well above the level of 5% in late August.

The next big test for Italy: The government will try to sell about $4 billion of five-year bonds on Monday. The current market yield on that debt maturity: a pricey 6.46%.

In a sign that investors remain suspicious about Eurozone debt in general, yields fell only modestly in other key countries. The Spanish 10-year bond yield slipped to 5.85% from a three-month high of 5.86% on Thursday.

And France -- the core of the Eurozone, with Germany -- remains a source of significant concern, after its bond yields also soared this week.

The yield on 10-year French bonds eased to 3.39% on Friday after jumping to a four-month high of 3.47% on Thursday.

The surge in yields on Thursday was fueled by an apparently erroneous report that Standard & Poor’s had cut France’s AAA credit rating. S&P later said the report was a mistake. Yet the French 10-year yield remains well above its level of 3.05% a week ago.

A continuing rise in French yields could be more dangerous for Europe than the surge in Italian yields, because France and Germany are considered Europe’s strongest economies. Without them, there is no possibility of rescuing the continent’s deeply troubled states.

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-- Tom Petruno

Photo: The Italian Senate on Friday, before its vote on austerity measures. Credit: Pier Paolo Cito / Associated Press