Without necessary reforms, eventually this vicious circle of stagdeflation would force Italy to exit EMU, return to the Lira and default on its Euro debts.
In consequence pension funds and banks will no longer be able to give up some of their bond yield in return for insuring the capital against government default.
It indicates that the government is a higher risk for default, and lenders will subsequently demand a higher rate of return with higher interest rates.
Asset finance has been cut back across the financial sector as the return on lending is often low and the rate of default over the last 18 months is high.
If you put your whole bond portfolio into the Vanguard index fund, which is mostly in U.S. governments, you have a fairly low risk of default but a fairly high risk of not achieving a positive real return.
To do a quick and dirty analysis of the expected return for junk bonds, all you need to do is look at the yield and subtract the default rate ( read why here).