EURO GOVT-Spanish yields rise as growth fears slam periphery
* Spanish yield jumps 22 bps on day to close in on 6 pct * German 10-yr yield matches record-low driven by safety bid * Italian bonds also pressured as tricky debt auction looms By William James and Kirsten Donovan LONDON, April 10 (Reuters) - Spanish bond yields rose to within a whisker of six percent and German Bund yields equalled their lowest-ever levels on Tuesday as doubts over global growth exacerbated concerns about the fragility of peripheral euro zone economies. Slumping demand for debt issued by Spain and Italy, exaggerated by low market liquidity, saw peripheral bond yields jump sharply as investors opted for the safety of German debt. The move was sparked by a below-forecast U.S. payrolls report, released on Friday when European markets were closed, that poured cold water on the recent optimism over growth in the world's largest economy.. Further signs of a global slowdown will heap pressure on the euro zone's peripheral debt issuers which are already battling with dwindling growth in the face of harsh austerity measures. "Markets are looking at slower global growth and then at those countries with relatively weak competitiveness and that leads you back to the periphery," said Rainer Guntermann, strategist at Commerzbank in London. "If the world economy slows down... then the peripheral countries will take an even larger hit." Spain has found itself the focal point of those concerns after relaxing budget targets earlier this year and with subsequent budget-cutting plans winning little investor support - culminating in weak demand at an auction last week. Spanish 10-year yields jumped 22 bps on the day to a four-month high of 5.99 percent before finding resistance at the psychological 6 percent barrier - though few in the market believed that level would halt the selling. "We're going to see Spain develop as the story this week as hedge funds look to short it," a London-based trader at an investment bank said. As investors piled into low-risk German debt, June Bund futures rallied 120 ticks to a peak of 140.35, within sight of March's all-time high of 140.52. SAFETY BID At the very short-end of the German curve, favoured by investors looking to park cash pulled out of riskier assets, two-year yields dropped below those on Japanese debt for the first time since at least 1991, according to Reuters data. Safe-haven Bunds have been caught between the conflicting forces of the euro zone debt crisis and signs of U.S. economic recovery that weighed on Treasury markets. But after Friday's data there was little resistance to a sharp move higher. Ten-year yields matched their all-time lows set in September of 1.637 percent. Even so, driven by anticipation the weak data would spur a fresh round of quantitative easing, higher-yielding U.S. Treasuries have outperformed Bunds, narrowing the yield gap by around 10 bps to 35 bps since Friday. AUCTION TESTERS Demand for German debt with such low yields will be tested on Wednesday with the launch of a new benchmark July 2022 bond paying a coupon of just 1.75 percent, the lowest on record. "It may be that the limited return and it being a new bond means that investors may want to wait to get involved," said Credit Agricole rate strategist Orlando Green. "But the environment does suggest there'll still be a decent amount of demand." Italy also sells bonds later this week and 10-year yields rose 16 basis points to 5.60 percent ahead of a 5 billion euro BTP auction on Thursday "After the Spanish supply last week, and with Italian supply this week, I just don't think anyone is prepared to stand in the way of these moves," a trader said.
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