These were the yields and basis point movements of some of the most watched 10 year bonds just before the close in Europe:

Spain: 5.71% (+8bp)
Italy: 5.16% (+11bp)
France: 2.25% (+4bp)
Germany: 1.55% (+3bp)
UK: 1.73% (+5bp)
USA: 1.67% (flat)

Italian and Spanish bonds dropped on Monday as investors mulled bad news on the Italian economy and concerns over the way the European Central Bank (ECB) has set up its latest rescue plan.

The Italian economy contracted a revised 0.8% in the second quarter, worse than the original estimate of 0.7%.

It is the fourth Italian recession since 2001 and, on these figures, it is getting worse rather than better.

Adding to market tension is the realisation that the ECB's plan to buy the short-term bonds of under pressure euro area nations depends on those nations agreeing to strict budget limits.

While this may salve the anger of Germany which has had to put up its cash to support the euro currency, most observers believe the conditions imposed on Greece have been counter productive.

The question now is whether either Italy and Spain will be willing to go cap in hand to the ECB and accept the rules, or hold out in hope that the mere existence of an escape route will improve the market perception of their creditworthiness.

BS

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