Lower yields on Italian bonds help stabilize markets

The Eurozone’s debt crisis eased a bit Thursday as Italian government bond yields pulled back from 14-year highs.

That allowed U.S. and European stock markets to stabilize after Wednesday’s slump.

Markets also looked past a sharp jump in French bond yields that was fueled by an apparently erroneous report that Standard & Poor’s had cut France’s AAA credit rating. S&P said the report was a mistake.

On Wall Street, the Dow Jones industrial average rose 112.92 points, or nearly 1%, to 11,893.86, recouping less than a third of its 389-point drop in the previous session.

Broader indexes were modestly higher. The Standard & Poor’s 500 index added 0.9%; the Nasdaq composite inched up 0.1%.


The market’s mood was helped by the government’s report that new claims for unemployment benefits fell to 390,000 last week, the lowest number since April. The data suggest underlying strength in the economy.

Optimism about growth helped to push U.S. crude oil futures up $2.04 to $97.78 a barrel, a three-month high.

Stocks had plummeted Wednesday as yields soared on Italian government bonds. Fear that Italy could default on its $2.6 trillion in sovereign debt has surged in recent weeks, opening a dangerous new chapter in the 2-year-old European debt crisis.

But Italy surprised markets Thursday by successfully selling $6.8 billion of one-year debt, although it paid a hefty price: a yield of 6.09%. Just a month ago, the country was paying 3.57% to borrow for one year.

Demand was strong enough at Thursday’s auction to calm the markets for the moment. Traders said the European Central Bank also was an active buyer of longer-term Italian bonds, trying to suppress yields.

The auction was “a relief to a market that could have easily gone into panic mode if Italian bond yields continued to rise,” said Kathy Lien, director of research at GFT Forex in Jersey City, N.J.

The yield on 10-year Italian bonds slid to 6.88% from 7.25% on Wednesday after rising early in the session to 7.40%, the highest since 1997.

Meanwhile, market yields on French bonds soared after S&P said a “technical error” caused it to send an email to some subscribers “suggesting that France’s credit rating had been changed.”

S&P said late in the day that there was no change; it affirmed that France’s rating remains AAA.

But the damage was done: The yield on 10-year French bonds rocketed to 3.47%, up from 3.20% on Wednesday and the highest since early July.

A continuing rise in French yields could be more destabilizing for Europe than the surge in Italian yields, because France and Germany are considered Europe’s core economies. Any threat to their finances would eliminate the possibility of the Eurozone’s rescuing its deeply troubled member states.

The French government knows it can’t afford for the bond market to turn on it. Paris announced a new round of spending cuts last week aimed at ensuring that the country holds on to its AAA rating.