Asian shares faced a decline on Tuesday, as an increase in euro zone bond yields reflected the lingering doubts bout the ability of the politicians in Greece and Italy to push through painful reforms to help resolve their debt problems and win over market confidence.
Jittery European credit markets also affected sentiment in Asia, sharply widening the spreads on the iTraxx Asia ex-Japan investment grade index–a gauge of investor appetite for risk. The spread was approximately 10 points wider Tuesday.
MSCI’s most broad index of Asia Pacific shares outside of Japan declined 0.5 percent, tracking a drop in global equity markets the previous day, while Japan’s Nikkei stock average .N225 declined 0.4 percent.
“Italy can’t find buyers to finance its debt, as fears over high price volatility in Italian bonds and speculators hitting shares of banks with huge exposure to Italy have made European financial institutions, traditionally long-term investors, wary of purchases,” said Takashi Nakagawa, a senior credit analyst at Daiwa Capital Markets.
Italy sold 3 billion euros ($4.1 billion) of five-year bonds at 6.29 percent on Monday, a record for the euro-era, fueling up worries that the high borrowing costs would derail the country’s attempts to slash its 1.9 trillion euro worth of debt.
Yields upon benchmark Italian 10-year bonds rose to 14-year highs of about 7.5 percent last week before Prime Minister Silvio Berlusconi stepped down and resigned.
Italy’s 10-year bond yields increased to 6.76 percent on Monday, also pushing Spain’s 10-year yields above 6 percent for the first time since the European Central Bank began to buy the country’s bonds in August.
The spread, or interest gap, of Italian bonds over German government bonds remained below 500 basis points.
“Global financial markets are facing a key pivotal point,” said Barclays Capital analysts in a research note.
“A further escalation of the European debt crisis is putting at risk the nascent stabilization of global growth and the associated buoyancy of risky assets outside of Europe,” they said, adding the European authorities could limit the damage through more involvement of the European Central Bank.
However, Bundesbank President Jens Weidmann on Monday had rebuffed that such global pressure upon the ECB to become a lender of last resort, stating that it could undermine the central bank’s hard-won credibility.
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