Europe's rising bond yields scare investors

Italian and Spanish bond yields climbed Tuesday, renewing world market worries about the eurozone.

NEW YORK (CNNMoney) -- European bond yields climbed Tuesday, with Italian yields surpassing a key threshold, setting off alarms in markets around the world as investors again worry about how the eurozone will solve its debt crisis.

Italy's 10-year bond yield ended just above 7%, a benchmark that makes traders nervous, since Italy is the third-largest bond issuer in the world.

Italian bond yields were trading above 7% for much of last week, when they hit a record high of 7.48%, despite a bond-shopping spree by the European Central Bank. It's imperative to keep Italian bond yields below 7%, because that's the level that Greek, Irish and Portuguese bond yields exceeded before those countries needed bailouts from their European markets.

But Italy, the world's eighth-largest economy, is too big to bail out.

Germany and France are the strongest economies in the euro zone, which does not include the United Kingdom. This is reflected in their 10-year bond yields on Tuesday, which closed at 3.68% for France and 1.78% for Germany. The French bond yield rose on Tuesday by more than a quarter percentage point, but the German bond yield was actually in decline before flattening at the close.

The German bond yield is watched closely by Europeans, who consider it to be the gold standard of stability. The fact that the German bond yield was moving in the opposite direction of its neighbors' bond yields indicates a widening spread that is further undermining the credibility of the weaker governments.

Europe: The worst case scenarios

The 10-year bond yield for Spain, one of several troubled economies in Europe, notched up to 6.3%. Irish bond yields also increased, to 8.2%. And then there's Greece, with its sky-high bond yield of more than 28%.

"Markets indeed appear to be broadening the scope of their concerns about the [eurozone] as pressures build on Spanish, Belgian, and French bond markets," wrote Marc Chandler, analyst for Brown Brothers Harriman, in a note to investors. "The focus on the growth outlook over the medium term is building. For [eurozone] policies to be deemed credible, they will need to balance austerity and growth."

The yields were climbing after reports showed that the gross domestic product for the 17 nations in the eurozone edged up a mere 0.2% in the third quarter.

This is the latest sign that economic growth in Europe is going nowhere.

The Italians have tried to deal with the crisis by pushing out Prime Minister Silvio Berlusconi and replacing him with banker Mario Monti. But analysts believe it will take more than a regime change to get the world's eighth-largest economy back on track.

"Given the huge structural problems Europe faces, and the fact that we continue to think the global sovereign crisis remains in the early stages, the honeymoon period for Mario Monti was always going to be short," wrote Deutsche Bank analysts Colin Tan and Jim Reid, in a report for investors.

"However, that it only lasted around an hour yesterday was extremely concerning on a day that saw Spanish 10-year yields above 6% for the first time since early August," they said.

Europe: New leaders, same old crisis

European stock markets echoed the concern. London's FTSE (UKX) was flat, having recovered its earlier losses, while the CAC40 (CAC40) in Paris was down 1.9% and the DAX (DAX) in Frankfurt dropped nearly 1%.

The pain was felt most acutely in the banking sector. The stock for Credit Agricole finished down 4%, while Societe Generale dropped more than 3%, while BNP Paribas plummeted about 5%.

Wall Street managed to shake off the European contagion, as the Dow Jones industrial average (INDU), S&P 500 (SPX) and Nasdaq (COMP) were all higher in the afternoon trading.