Italy's long-term borrowing costs edged up at an auction on Thursday for the first time in three months, adding to signs that a 10-month-long rally in vulnerable euro zone bonds may be faltering. They remained well below levels that triggered concern during the height of the euro zone debt crisis, however.
The rise in long-term yields followed an uptick in Rome's short-term debt costs on Wednesday and a rise last week in Spanish debt. The moves reflected investors' concerns the US Federal Reserve may soon begin unwinding its ultra-loose monetary policy programme - withdrawing some global liquidity. That has generally lifted bond yields across the board, although bonds in peripheral euro zone economies have fared worse than those of core Germany.
The impact of the European Central Bank's pledge to buy bonds of troubled euro zone economies in certain circumstances may also have run its course in terms of how far down it can push yields, although it is likely to remain a backstop for the market. Analysts said the auction was positive in terms of the current cautious market mood, but some said bond markets could become rough for peripheral countries as investors turn to countries' economic fundamentals they have long neglected.
"Amid increasing signs that the tide is turning against peripheral euro zone bond markets... Italy was still able to pull off a strong auction," said Nicholas Spiro, managing director at Spiro Sovereign Strategy. Rome sold 3 billion euros of 10-year bonds at 4.14 percent, its highest level since March. At a similar sale a month ago, it had paid 3.94 percent, the lowest since October 2010. The treasury also placed 2.75 billion euros of 5-year bonds at 3.01, up from 2.84 percent one month ago.
Despite Thursday's rise, Italy's 10-year borrowing costs remained well below 6.20 percent posted at an auction at the end of June last year, before the pledge by the ECB to buy bonds of weaker euro zone countries prompted a rally in peripheral government bonds. "Yields rose but this reflects what we have seen in the secondary market since last week after (Fed Chairman) Ben Bernanke's speech," said Luca Cazzulani, fixed income strategist at Unicredit.