EURO GOVT-German Bund yields hit record low as Spain fears grow

LONDON, April 16 Mon Apr 16, 2012 2:13am EDT

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LONDON, April 16 (Reuters) - German 10-year Bund yields hit a fresh record low on Monday on persistent concerns that Spain's failure to convince investors it can keep its budget deficit in check could cause a new round of financial stress in the euro zone.

The latest blow to Spanish markets was triggered by data on Friday that showed record borrowing by its banks from the European Central Bank. It is likely that most of the funds have been parked in domestic government debt, making them more vulnerable to sovereign stress.

"The risk aversion is set to continue and it should mean that Bund futures test the all-time high today," Commerzbank rate strategist Rainer Guntermann said. "We would argue there is a bit of headroom towards the long-term channel resistance at 141.20 and this would be the target today."

The renewed pressure on Spanish markets has increased speculation that the ECB could soon re-activate its bond buying programme even though many fear it has lost some of its power after the central bank was given preferential treatment in Greece's debt restructuring.

The ECB itself seems reluctant to resume bond purchases, with Governing Council Member Klaas Knot saying on Friday he hoped the bank never has to use the programme again.

Fearing contagion from Spain to other euro zone countries, investors were seeking refuge in low-risk Bunds. The June futures contract was last 5 ticks higher at 140.41, while 10-year cash yields were 1.2 basis points down at 1.633 percent, having hit an all-time low of 1.63 percent seconds after the opening.

The previous record high for Bund futures was 140.52 on March 7.

Spain faces a test of investor confidence this week with an auction of two- and 10-year bonds on Thursday.

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