Italy's bond market frail on emerging market woes - Bloomberg

As reported by Bloomberg, expected government budget cuts are mixing poorly in Italy's Euro bond market with emerging market contagion fears.

Key quotes

"Contagion fears have been sparked across riskier markets after the Argentine peso fell to a record low last week and the Turkish lira resumed its slide. That pushed Italy’s 10-year yield spread over Germany to close at a five-year high on Friday, a sign that investors are perceiving the risk in the euro-area’s third-largest economy as similar to the debt crisis.

“We are in an environment where the ‘weak’ are punished,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S. “If the emerging-market crisis escalates, we could see a 300-basis-point Italy-Germany yield spread.”

Italian benchmark bond yields are now only lower than Greece’s in the euro area, with those of Portugal and Spain relatively unperturbed by the spillover from the emerging-market turmoil. Italian investors are awaiting the government’s spending plans, which could threaten the European Union’s deficit limit of 3 percent of economic output and lead to rating-agency downgrades."