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4/26/13

EU Economy: Europe's Bonds Rally While Economies Continue to Slide - by Charles Forelle

The bond markets and the economies of Europe's struggling countries tell two very different stories this year: One is rallying; the other, sinking.

In July 2012, Italian 10-year bonds yielded more than 6%; this week they fell below 4%. Falling yields mean rising prices. The Italian economy, meanwhile, has been ugly. Gross domestic product in the fourth quarter of 2012 slid 2.8% from the same period in 2011, the sharpest quarterly fall since 2009. Italian unemployment was 11.6% in February, up from 10.6% in July. The tale is similar in Spain.

The bond-market rally has broad implications for the euro zone. At a basic level, access to financing is the measure of the crisis. Greece, Ireland, Portugal and Cyprus ultimately needed bailouts because they couldn't persuade investors to lend them money. Spain and Italy can avoid similar fates so long as investors are buying bonds.

Right now, demand seems robust: Wednesday, Italy sold €2.5 billion ($3.25 billion) of two-year zero-coupon bonds at the lowest yield it has received for the instrument since the introduction of the euro. Such bonds are sold at below face value and repaid in full upon maturity.

Read more: Europe's Bonds Rally While Economies Continue to Slide - WSJ.com

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