* Spanish 10-year yields top 6 percent, contagion fears rise
* German 10-year Bund yields hit record lows
* Markets speculate ECB may resume bond-buying programme
By Marius Zaharia
LONDON, April 16 Spanish 10-year government bond
yields jumped above 6 percent for the first time this year on
Monday as concerns over the country's ability to keep its
finances under control pushed debt markets back into "crisis
Spanish yields were expected to rise further towards the 7
percent level beyond which debt costs are widely viewed as
unsustainable unless the European Central Bank resumes its bond
purchases after a two-month break.
Yields on Germany's benchmark 10-year Bund, viewed as the
euro zone's safest debt, hit a record low of 1.628 percent. The
previous record was established in November 2011, at the height
of the debt crisis and before the ECB injected around 1 trillion
euros of cheap three-year funds into the banking system.
"We're back in full crisis mode," Rabobank rate strategist
Lyn Graham-Taylor said.
"It is looking more and more likely that Spain is going to
have some form of a bailout. Assuming there is not an (ECB)
intervention you would not see a cap on Spanish yields, they
would just keep increasing."
The latest blow to Spanish markets followed data on Friday
that showed record borrowing by its banks from the ECB.
Investors' main fear is that banks parked most of the funds in
domestic government debt, making them more vulnerable to
Spain faces a test of investor confidence this week with an
auction of two- and 10-year bonds on Thursday.
Spanish 10-year yields rose 11 basis points at
6.10 percent, five-year yields topped 5 percent,
while two-year yields spiked to 3.75 percent, all
Six percent is psychologically important for markets as the
pace at which yields rise has accelerated on previous occasions
when that level was broken. Beyond 7 percent, Greece, Portugal
and Ireland struggled to raise cash in the market and were
forced to seek financial aid.
Investec fixed income analyst Elisabeth Afseth said current
yields indicated that the euro zone crisis had entered a new
phase and that markets have put the effect of the ECB's cash
offerings behind them.
"The ECB's actions bought some time and provided some
liquidity but it never was in a position to do anything about
solvency ... and this is what we're facing now. I would not be
surprised if yields go back to (record) levels," Afseth said.
Spanish yields hit euro-era highs of just under 7 percent in
November last year, when Italy was considered the main source of
contagion. Italian 10-year yields were over 7.5
percent at that time, compared with 5.6 percent on Monday.
Underlining investor fears, the cost of insuring Spanish
debt against default hit a record high at 522 basis points,
meaning it costs of $522,000 a year to buy $10 million of
protection, according to data from Markit.
LESS SENSITIVE TO ECB
Speculation the ECB could soon step in to ease the pressure
was rife, although investors feared its bond-buying programme
may have lost some of its potency after the central bank was
given preferential treatment in Greece's debt restructuring.
The ECB 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.
"The problem ... is that the bigger the position the ECB
builds in a sovereign's debt, the greater the private sector
holders are likely to perceive their probability of default,"
Credit Agricole rate strategist Peter Chatwell said in a note.
"As such, the (programme) might be used more sparingly than
in the past and we expect spreads to be less sensitive to any
buying than they were last year."
Also stretching nerves in bond markets were signs that the
world's largest economies were hesitant to raise new resources
for the International Monetary Fund to contain the euro zone
The ongoing risk aversion should push Bund futures
above their record high of 140.52 and head towards 141.20, a
level projected by a trendline connecting recent highs,
Commerzbank rate strategist Rainer Guntermann said.