For the first time in eighteen months, Italy is a riskier investment than Spain.
Political turmoil surrounding Silvio Berlusconi has forced Italian 10 year yields to their highest level in almost a year.
Commerzbank analyst Michael Leister.
(SOUNDBITE)(ENGLISH) COMMERZBANK SENIOR INTEREST RATE STRATEGIST MICHAEL LEISTER SAYING:
"We have been expecting this move across the curve for a good few weeks now because on the fundamentals side, especially when you look at the reforms Spain has really done its homework. They have actually done quite an impressive job, the government there. Italy of course with the government crisis is not following suit in that regard. And of course this ongoing limbo and this looming decision on Berlusconi is also weighing on sentiment here."
A Senate Committee is debating whether or not to expel the former premier, who was convicted of tax fraud last month.
His supporters have threatened to bring down Letta's fragile coalition government if he's forced out.
But Barclays' Will Hobbs says turmoil is the norm in Italian politics, and that Italy's borrowing costs should ultimately improve.
(SOUNDBITE)(ENGLISH) BARCLAYS' VP RESEARCH ECONOMICS AND STRATEGY WILL HOBSS SAYING:
"The Berlusconi affair has been ongoing for some time now. And actually overall the last year sort of trend has been pretty much down for Italian borrowing costs. Rather than call anything too tactically, I would still say that over the medium term you can see Italian borrowing costs trend downwards as the euro crisis continues to abate."
Italy's Treasury sold 4 billion euros of a new three year bond at an average 2.7 per cent yield.
That's up from 2.3 per cent at an auction in mid-July, but well below a peak of more than 5 per cent more than a year ago.
Italian debt is also being impacted by expectations the U.S. Fed will begin scaling back its bond buying program, possibly as soon as this month.