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World markets see-saw as Italy’s borrowing costs ease

The yield on Italian 10-year government bonds drops 27 basis points to 6.94% as the ECB reportedly buys Italy’s short-term debt.

Britain’s FTSE 100 and other global stock indices see-sawed on Thursday as Italy’s borrowing costs retreated, but fears persisted that the eurozone’s debt crisis will engulf the region’s third biggest economy.

The yield, or implied interest rate, on benchmark Italian 10-year government bonds dropped 27 basis points to 6.94%, more than half a percentage point lower than the euro-era peak of 7.5% it hit on Wednesday, which is widely seen as unsustainable.

The falls came as the European Central Bank (ECB) reportedly bought short-term Italian debt and as Mario Monti, former European commissioner, emerged as favourite to replace departing prime minister Silvio Berlusconi.

A one-year debt auction, in which Italy paid 6.087% – the most in 14 years – but placed the full planned amount of €5 billion, also stoked relief in markets.

‘Today’s Italian bond auction was considered a “success” – demand for 12 month bills was strong, but the bulk of interest was domestic suggesting that the bottom has fallen out of the Italian debt market,’ said Kathleen Brooks, research director at Forex.com.

And just as Italian bond yields fell, the yield on France’s government debt surged 27 basis points to 3.48%, a worrying development for the eurozone’s second largest economy, whose prized AAA credit rating is on the line. UK gilts, by contrast, eased one basis point to 2.23%.

The FTSE 100 shed 0.28%, or 16 points, to 5,445 – down from a day high of 5,497 –and the All Share index weakened 0.36%, or 10 points, to 2,806.

Other stock markets in Europe wobbled: France’s CAC 40 index slid 0.34% to 3,065, and the FTSEurofirst 300 index of top European shares edged down 0.33% to 963, but Germany’s DAX index took on 0.66% to 5,868.

The ECB is increasingly seen as the only body that can provide a viable short-term solution to Italy’s woes, as the eurozone’s leaders are said to discuss a break-up of the monetary union.

Ed Yardeni, founder of Yardeni Research, noted that if all else fails, the central bank would have no choice but to come to the rescue. ‘Sure enough, the Italian bond yield is back down below 7% this morning on ECB buying,’ he said.

Meanwhile, Wall Street rebounded following better-than-expected jobs data. The Dow Jones Industrial Average hardened 1% to 11,899, the Standard & Poor’s 500 index added 0.47% to 1,235, and the Nasdaq Composite index inched up 0.31% to 2,630.

The US Labor Department said earlier that the number of claims for unemployment benefits last week fell by 10,000 to 390,000, down from 400,000 a week earlier. The average forecast in a Reuters poll of economists had called for 400,000 new claims.

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