Italy again had to pay investors lofty yields averaging above 7% at its government bond auctions Tuesday, as the euro-zone's third-largest economy continues to borrow at costs that forced Greece, Portugal and Ireland to seek external bailouts.
The auction of up to €8 billion in bonds over a range of maturities saw Italy paying a yield of 7.89% on three-year bonds and 7.56% on 10-year paper. Both marked new euro-era highs.
That Italy had to offer higher yields on shorter-dated bonds at Tuesday's sale underscores how investors want to be compensated for the risk attached to the country's near-term fiscal outlook.
Even the two-year outlook carries risk. In secondary markets, the yield spread between two-year bonds at 7.04% and 10-year bonds at 7.31% remains uncomfortably tight.
Italy is reliant on the support of the European Central Bank, which buys up Italian debt in the secondary market to lower its yields. But the ECB has so far resisted the large-scale purchases that many observers say will be necessary to reassure investors.
Meanwhile, attention is focused on a meeting in Brussels late Tuesday of the 17 euro-zone finance ministers, who are pressing for ways to increase the lending volumes available to the European Financial Stability Facility, the European Union's government bailout fund, and to speed fiscal integration and controls within the currency bloc.
Unsustainable borrowing costs for some of the euro-zone's biggest members has intensified pressure on euro-zone policy makers to devise a convincing plan that will contain the spread of the debt crisis to its core constituents. Even Germany last week was unable to sell all the bonds it wanted to, after investors demanded higher premiums.
Unless euro-zone leaders come up with a solution to the currency union's financial and fiscal woes, foreign investors could offload more than €1 trillion of euro-zone bonds in the coming months, Nomura warned in a research note.
Non-European investors, in particular, have been steering clear of European sovereign debt, even turning down direct appeals to help fund the EFSF bailout fund.
An executive at investment bank China International Capital Corp. said the European debt crisis will enter a crucial period between February and April next year as a large amount of existing debt will need to be rolled over, pushing Italy and Spain into dangerous territory.
Italy is expected to raise around €220 billion in the bond market in 2012, Barclays Capital estimates.
