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Italy's bond test

June 13, 2012: 9:47 AM ET

Italy faced its first in a series of debt auctions Wednesday and it wasn't pretty.

The government sold 6.5 billion euros of 1-year notes at an average yield of 3.97%. That's sharply higher than the 2.34% yield at last month's auction and may signal further trouble ahead.

Italy's borrowing costs have been creeping higher as investors worry the country may be headed closer to bailout territory. The yield on Italy's 10-year bond edged up to 6.2% so it still has a ways to go before breaching the 'danger' level of 7%.

Related: Euro crisis: It's still not over

The bigger test will come Thursday, when Italy auctions off 4.5 billion euros worth of 3-year bonds. Currently, those bonds are yielding around 5.3%.

Jitters about the upcoming Greek elections are driving investors to the sidelines, with European stocks barely budging.

"The fixed income market remains very bearish ahead of this weekend, while other markets are looking more beyond the week end at the expected response of policy makers, whether from Europe or the Fed with a likely move to QE this month," said Societe Generale fixed income analyst Sebastien Galy.

The DAX (DAX) in Germany slid 1% following an auction of 10-year bunds that drew an average yield of 1.5%. The FTSE 100 (UKX) and CAC 40 (CAC40) slid about 0.5%.

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