Bond Rally Weakens Monti’s hand with Merkel

Italian Prime Minister Mario Monti’s campaign for collective action to fight Europe’s debt crisis may be compromised by falling bond yields as he meets German Chancellor Angela Merkel.

Italy’s credit is as good as it has been in three months, according to a decline in 10-year bond yields. Short-term rates have fallen too. Monti’s Treasury sold six-month bills today at the lowest rate since March. That may make it easier for Merkel, who is hosting Monti in Berlin today, to sidestep the Italian premier’s proposal for the region’s rescue funds to buy bonds with the support of the European Central Bank.

“Monti’s arguments have more force when yields are spiking in spite of the fact that his government has implemented a number of credible reforms,” said Mujtaba Rahman, an analyst at Eurasia Group in New York. “It is at this moment when his argument carries more thrust with the Germans.”

Monti, 69, is on the road as European leaders prepare for the next phase of fighting a crisis that started with Greece three years ago and spread to Ireland, Portugal and Spain. Italy, which is due to sell $21 billion of debt in the next two days, still pays about 1 percentage point more to borrow for a decade than the average for the last five years. Monti said he may request bond buying to bring down funding costs, while seeking to limit any conditions the European Union would try to impose.

Bloomberg

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