Italian bonds slid for the fifth straight day on Friday, driving yields to a nine-year high, as contagion from Greece's fiscal crisis intensified in the region's biggest government-debt market.
German 10-year yields fell the most since April after US employers added less than a fifth of the workers economists estimated in June. The yield on 10-year Italian securities jumped to a euro-era record over German bunds as data showed industrial production in the Mediterranean nation dropped while Italian bank stocks fell, paced by UniCredit SpA. A European Union document said governments should be ready to help banks that fail stress tests as a last resort. Spanish, Irish and Greek bonds also fell.
"If you are talking about a default in Greece where contagion spreads through Ireland, Portugal and Spain, then Italy is the next stop," said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. "Italy has an awful lot of debt."
The yield on 10-year Italian bonds rose 10 basis points to 5.27 per cent in London, up from 4.87 per cent a week ago.
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The yield reached 5.38 per cent, the highest since June 2002. The 4.75 per cent securities due in September 2021 fell 0.715, or €7.15 euros per €1,000 ($1,424, Dh5,330) face amount, to 96.455.
Italy's two-year note yield jumped as much as 29 basis points to 3.61 per cent, the most since November 2008.
Credit-default swaps on Italy rose 23.5 basis points to 241, the highest level since January 11, according to CMA.
Italian industrial output declined 0.6 per cent in May from April, when it rose 1.1 per cent, the Rome-based statistics office Istat said.
Italy's Finance Ministry yesterday said new measures aimed at balancing the budget will total €40 billion, with most of the cuts in the four-year plan scheduled for 2013 and 2014.
Finance Minister Giulio Tremonti said on Friday he moved out of a Rome apartment provided by Marco Milanese, a former aide and member of Parliament whose arrest is sought by prosecutors in Naples.
He had a "long and cordial working lunch" with Prime Minister Silvio Berlusconi, the leader's office said.
The nation is the euro area's biggest bond market, with €1.8 trillion of outstanding debt as of December. 31, compared with €1.1 trillion of German debt outstanding on March 31, according to websites from the nations' debt agencies.
The difference in yield, or spread, between German and Italian 10-year debt touched 247 basis points, headed for its biggest weekly increase since at least January 2010.
The difference in the price of Italian and German bond futures widened to a record as the Italian securities fell 0.8 per cent to 104.57.
The yield spread between Italian and Spanish 10-year bonds narrowed to 42 basis points, the least since March.
"The reality now is that those pesky bond vigilantes have caught sight of Italy, and that is basically all that matters," Michael Riddell, a London-based fund manager at M&G Investments, said in his blog on the company's website.
"Rising sovereign and bank borrowing costs will lead to credit-rating downgrades. In other words, credit ratings partly get cut because the bond prices fall."
The Bloomberg Europe Banks and Financial Services Index was down 2.3 per cent. UniCredit dropped as much as 8.8 per cent, while Bank of Italy Governor Mario Draghi said he's certain that the country's lenders will pass European stress tests.
Banks that fail this year's round of EU stress tests may need to present plans for making up their capital shortfall by the end of September, according to an internal EU document. They may be given a further three months to implement these plans and raise the additional capital they need, according to the preliminary document obtained by Bloomberg News.
German bund yields fell 14 basis points, the biggest drop since April 18, to 2.83 per cent, outperforming French, Belgian, Dutch, Austrian and Finnish securities of similar maturity.