Eurozone bond rates ease sharply, Italian yield below 6%

Tensions eased sharply on European bond markets on Monday after Italy announced tough new austerity measures and German and French leaders proposed a new treaty to tighten eurozone budget discipline.Italys long-term borrowing rate fell back below the key 6.0 percent threshold, and rates also dropped on Spanish and French bonds throughout the day, although they rose for Ireland.Sentiment was lifted after French President Nicolas Sarkozy and German Chancellor Angela Merkel said they wanted a new EU treaty to tighten budget discipline.They called for automatic sanctions for countries whose deficits exceed the EU limit of 3.0 percent of GDP and for a new EU treaty to tighten controls on spending, ahead of a crucial EU summit in Brussels at the end of the week.In Italy, confidence had already risen after the cabinet gave its go-ahead to a crisis-busting plan on Sunday estimating that it would save 20 billion euros ($27 billion).The rate of return on Italian government 10-year bonds on Monday fell to 5.983 percent, dropping below 6.0 percent for the first time since the end of October.The easing of tension on the secondary market on Monday sent a signal that this outlook has receded in the light of the governments latest action, the third austerity package in recent months.The yield on 10-year Spanish bonds also fell to 5.071 percent at 1530 GMT against 5.626 percent on Friday.Frances 10-year borrowing cost dropped to 3.136 percent from 3.253 percent at the end of last week, with the difference between its and Germanys borrowing cost dropping back under 1.0 percentage points.Benefitting from less safe-haven sentiment, the yield on 10-year German bonds rose to 2.210 percent from 2.131 percent Friday.Agence France Tresor, which handles government debt, said separately that it had raised 7.506 billion euros by issuing new short-term treasury bills, with borrowing costs falling.The falls came at the start of a week seen as as critical for the eurozone.Tensions on the eurozone bond market had already eased at the end of last week on rising sentiment that Germany and France are coming close to a new strategy for a solution to the eurozone debt crisis.