EURO GOVT-Spanish yields rise as growth fears slam periphery

Tue Apr 10, 2012 12:29pm EDT

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* 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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