News Analysis: Italy Bond Yields Rising on Economic Worries, Election Concerns

ROME, Feb. 1 -- The yield on Italian bonds rose for the third consecutive session Thursday, and the fourth time in five trading sessions, as analysts said that worldwide economic woes sparked by concerns about the U.S. economy's near-term health drove investors from riskier markets, like Italy.

The benchmark 10-year bond closed Thursday on secondary markets at 4.34 percent, narrowly higher than on Wednesday. All told, the yield is up from a low of 4.14 percent before the rising trend began last Friday.

For sure, yields are still below averages for the previous 15 or 30 sessions, and significantly lower than the over-7-percent yields in late 2011 that sparked concerns that the eurozone's third largest economy could be forced to default on its bond payments.

Those fears are gone now, but analysts said the recent upward trend showed that markets remain volatile.

"On the surface, the indicators mostly show markets moving sideways and a certain amount of predictability in what most investors expect going forward," said Javier Noriega, chief economist with investment bankers Hildebrandt and Ferrar in Milan. "But just under the surface, investors are jittery and almost anything can set them off."

In this case, it was continued reports of moribund economic growth from around the world, combined with the meeting of the U.S. Federal Reserve, which gave no indication that it would tighten its monetary policy in the near term.

That spooked some investors, driving them from higher yielding and higher risk bond markets like Italy, Spain, and Portugal, to relative safe havens, like cash positions or German bonds.

It is unlikely to be part of a long-term trend: yields dropped slightly in after-hours trading Thursday, meaning it is likely they'll fall, at least at the start, when trading begins Friday.

But analysts said the underlying lesson is that investors appear not to be completely sold on the argument from Italian Prime Minister Mario Monti that Italy had graduated from the group of high-risk eurozone countries.

"It still doesn't take much to worry investors about Italy," Noriega said.

Italy's national elections, scheduled for Feb. 24-25, are another factor contributing to investor concerns about the country's economic prospects.

Monti, who took over as the head of a technocrat government in November 2011 with Italy on the edge of the European debt crisis, is running to stay in the job. But he is trailing behind former minister Gian Luigi Bersani and Silvio Berlusconi, the controversial media tycoon Monti replaced as prime minister.

Though Bersani, leading in the polls, has said he generally supports Monti's reform-minded agenda, Berlusconi has taken a more populist stance and has promised to lower taxes and increase government services.

Berlusconi promises he would not worsen Italy's economic condition, but investors are not so sure. And with Berlusconi gaining in the polls, Bersani may be forced to adopt some of more populist stances in order to fight off Berlusconi's challenge.

In the end, analysts say, election worries could have a bigger effect on investor confidence in Italy than any other factor.