Forex News – Euro falls as Italian bond yields surge after auction

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The euro plunged further down after a poor Italian bond auction today which resulted in the two-year and five-year government-bond yields to soar to euro-era highs.

The two-year and five-year Italian government bond yields surged to 7.7% and 7.8%, respectively, and the 10-year yield moved further above the critical 7% mark to 7.3%.

Italy’s disappointing bond auction doesn’t bode well for the indebted economy since a sharp rise in bond yields, if sustained for a long time, would cause the country’s debt-servicing costs to soar.

The Italian government is scheduled to have another bond auction on Tuesday next week for longer-term bonds and hopes to raise €8 billion. If the results are not as desired, it would have disastrous consequences.

The Italian bond market is the world’s third largest so if Italy is potentially shut out of the debt markets and finds itself unable to raise funds from the market at affordable rates, then the country would end up on the same path as Greece and seek a bailout. The only difference is that Italy is too big to bailout and the European Financial Stability Facility rescue fund would not be able to handle the load.

The euro declined further against the dollar following the bond auction, dropping to $1.3224 by 11:30 GMT, its lowest level since Oct. 4.