Italian and Spanish bonds soar while UK yields look like a safe haven

2nd August 2011

Both Italian and Spanish ten year bonds are now trading above what is regarded the dangerous six per cent mark.

CityAM reports that Eurozone unease was compounded by the Bank of Cyprus which said there was an "imminent threat" of the country "joining the European Union support mechanism" on Monday.

The country's banking sector holds around €5bn (£4.4bn) worth of Greek sovereign debt and is heavily reliant on the stricken country for trade. The yield on its 10-year bonds was at 10.54 per cent yesterday, up from 9.71 per cent on Friday.

The Cyprus Mail reports on the bank's warning. The bank said: "With our inaction we are risking the ability of refinancing the state and the consequences will be immediate and serious. There is an immediate threat of Cyprus joining the European Union support mechanism, with whatever drawbacks that will entail."

The Guardian's take on the story is that the Eurozone crisis has reignited. It reports that the yield on Italian 10-year bonds rose to nearly 6.3% at one stage, with the equivalent Spanish bonds yielding almost 6.5% early on Tuesday. The paper suggests that if yields reach 7%, a country has effectively lost the support of the international markets.

Here FT Alphaville looks at the huge difference between UK gilts and Italian bonds that are resulting from the Eurozone problems and offers the following explanation.

It says: "That's a modern record low for the 10-year gilt yield and a record eurozone high for its Italian peer. Outwardly, it's an amazing gulf in some respects as both sovereigns are doomed to low growth. But if Italy is the liquid proxy for a euro break-up, and it can't be hedged*, and private-sector involvement is in its future – suddenly sterling looks like the cleanest shirt in the dirty basket.

On the Guardian superburger writes: "To understand how indebted an economy is they need to look at private and corporate debt before government debt. And the UK is in a pretty bad state by those measures. Maybe, but government debt is what is under discussion – and the fact (however much people dislike it) is that the UK has always paid its debts, and (again, however much people don't like it) has a reasonably clear plan on how it's going to reduce its deficit. Plus it is not in the Euro."

Here Morningstar UK reports EU officials saying that no rescue packages for Spain, Italy or Cyprus are currently on the table.

And here Citigroup publishes a detailed 64 page report on Italy.

Mindful Money economist Shaun Richards has his say on the matter here.

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