* Talk of ECB bond buying brings Italian yields below 6 pct
* But pressure on BTPs, peripheral debt remains
* Bunds fall after hitting highest since November
(Updates to close)
By Ana Nicolaci da Costa and Emelia Sithole-Matarise
LONDON, July 12 Peripheral euro zone government
bonds recouped losses and rallied on Tuesday as talk of central
bank buying of some lower-rated debt and the prospect of a new
EU crisis meeting prompted profit-taking in benchmark German
Earlier in the session, yields on Spanish and Italian bonds
hit their highest levels in 14 years -- with the Italian 10-year
yield coming close to the 7 percent level analysts see as an
unsustainable cost for Italy's borrowing.
Analysts said traders did not want to be caught off guard
should the extra EU leaders summit, slated for Friday, and
unconfirmed talk of European Central Bank buying, indicate
policymakers had been seized with a new sense of urgency to
resolve the euro zone crisis.
The talk gave traders an opportunity to cash in on recent
gains in German bonds in an otherwise Bund-positive environment:
European finance ministers acknowledged for the first time that
some form of default may be needed to cut Greece's massive
"Spreads have come in from the wides this morning but I
think it's just fast money who are pushing this market around. I
haven't heard of any real money getting involved in Italy or
Spain," a trader said, adding that given the recent Bund rally,
some profit-taking was inevitable.
"I don't think you can be at all bearish on Bunds...The
market is still seen as very fragile. Nothing much has come up
in terms of solving the sovereign debt crisis."
Italian/Bund 10-year yield spreads reached a
euro life-time high above 350 basis points but later settled
back to 288 basis points, 15 basis points tighter on the day.
Earlier, Italian 10-year yields jumped more than 30 basis
points on the day to break above 6 percent for the
first time since 1997.
They later slipped back below 6 percent on market talk the
ECB was buying Italian and Spanish bonds even though bond
traders who normally see such transactions said there was no
sign of purchases. Yields settled down 8.4 bps at 5.60 percent.
Spanish/Bund 10-year yield spreads hit a high
of around 380 basis points before falling to 318 basis points,
21 basis points tighter on the day.
Peripheral bonds have been hammered in recent sessions as
contagion spread beyond weaker euro zone members to engulf Italy
-- the euro zone's third largest economy.
The scale and speed of the market moves raised concerns over
the cost of financing Italy's 1.6 trillion euro debt burden.
Indeed, Italy's short-term cost of borrowing surged to its
highest since the 2008 financial crisis at a government bill
sale on Tuesday. .
The fear is that if Italy were to become the next victim of
the euro zone debt crisis it would be too large to be bailed out
in the way Portugal, Greece and Ireland have been.
Graphic comparing Italy with other 'debt-heavy' EMU countries
Italy debt/deficit comparison r.reuters.com/baz52s
Euro zone bond yields r.reuters.com/saz52s
Euro zone finance ministers late on Monday promised cheaper
loans, longer maturities and a more flexible rescue fund to help
Greece and other EU debtors but failed to set a deadline to
Earlier, Germany's finance minister had said a second Greek
rescue package could wait until September after euro zone
finance ministers effectively accepted that private sector
involvement meant a so-called selective default was likely,
despite the ECB's vehement opposition to such a move.
As EU officials began to publicly acknowledge the risks,
investors were losing hope of a sustainable solution any time
"Without getting bogged down in a long list of policy errors
during the crisis, current levels of Bund yields and periphery
spreads probably best express just how much the market has lost
faith in policymakers," Michael Leister, a strategist at WestLB
Benchmark German Bund futures FGBLc1 reversed gains to
settle down 25 ticks at 128.89. They earlier hit their highest
since November at 130.91.
Cash 10-year Bund yields were up 3 bps at 2.70
percent, while the two-year Schatz yielded 1.28 percent
, less than the ECB's key refinancing rate of 1.50
percent as the market priced out expectations of further
interest rates hikes this year .
(Graphics by Scott Barber)