Italian yields skyrocket on 12-month bond auction

Yields on 12-month bonds increase to near December levels in auction

While everyone likes to hate on Cyprus, it is Italy that is the focal point of today's European "omnishambles" that has seen the EURUSD tumble to a five month low as of this writing. First it was economic data that scared investors, with Industrial Sales and Orders tumbling far below expected, posting numbers of -1.3% and -1.4%, respectively, on expectations of an increase. Retail sales were just as ugly, declining by -0.5% in January, on expectations of an unchanged print, with the December 0.2% number revised also into negative territory.

So much for a quiet Christmas in the euro zone. The European debt crisis has been off boil for the past several months, but we all knew it was just a matter of time before the steam started rising again. The question was: What would turn up the heat? I would have put my money on Spain stumbling into a bailout program, but instead the spark has come from one of the key figures in the euro zone: Italian Prime Minister Mario Monti. The respected economist surprised financial markets on Saturday when he announced he would step down early, after the latest budget passed through parliament.

Italy raised 7.5 billion euros ($9.2 billion) euros in one-year bonds on Thursday at a sharply lower rate than in the last similar sale, the Bank of Italy said, indicating improved investor confidence.The rate on the 12-month bonds was 2.697 percent compared to 3.972 percent in an auction on June 13. Demand for the bonds was 11.596 billion euros.The short-term bond auction was a key test for Prime Minister Mario Monti who earlier this week did not exclude the possibility that Italy might eventually have to rely on European assistance to help lower its borrowing costs.

Conditions at the EU summit are breaking down more than expected thanks to a position taken by Italian Prime Minister Mario Monti. Acting like a spoiled brat in a game of marbles, Monti refuses to let anyone else play unless he gets the big green marble he wants. In less colorful terms, Bloomberg explains Monti Withholds EU Growth Pact Approval Unless He Gets Interest Rate Relief.

Sovereign bond yields in Spain and Italy have been climbing across the board, not just the longer durations. Please consider Italy pays dearly to issue one-year debt. Italy sold €6.5bn of one-year debt at the highest cost since December, underscoring how one of the world’s biggest bond markets has been dragged back into Europe’s debt crisis.

Just over two years ago I warned that Spain posed a significant threat to the EU area economies. This was a very popular stance, and since I'm more of a medium to long term strategist and Spain didn't experience any immediate pain, my stance was considered even more morose. Well, luckily, I supplied ample research to paying subscribers who were well prepared for what is now evidently coming down the pike.