Bonds News

EURO GOVT-Bunds rise on periphery nerves; Spanish yields up

* Bunds rise on periphery worries

* Struggle to gain traction on anxiety over bailout costs

* Spanish yields up more than 50 bps on week

LONDON, Nov 26 (Reuters) - German government bond yields fell on Friday while those on Portuguese and Spanish paper rose on mounting anxiety about how far contagion from the Irish debt crisis will spread to the rest of the euro zone.

The premium investors demand to hold Irish government bonds rather than German benchmarks hit a new euro-lifetime high of 694 basis points on reports that senior bondholders would share the cost of rescuing Ireland’s banks.

Spanish and Portuguese bonds underperformed too, with Portugal’s 10-year yield spreads over Bunds rising by 18 bps to as high as 471 bps after the Financial Times Deutschland reported that the majority of euro zone states and the European Central Bank were urging Portugal to apply for a financial bailout. [ID:nLDE6AP08Y]

But the European Commission said it was not aware of any talks to press Portugal to accept EU Aid [ID:nLDE6AP0JN].

“Yet again, we’ve kind of shot ourselves in the foot this morning in terms of the front page of the Irish Times talking about how senior bondholders may have to burden-share in relation to the Irish banks,” a trader said.

“If the story in the Irish Times is true, Spain and Portugal and Italy and everybody will be feeling the effects of it,” he said.


The 10-year Spanish yield spread over Bunds hit a new euro lifetime high as investors fretted about the fallout to other euro zone countries. Ten-year yields are have risen more than 50 basis points over the week to 5.25 percent.

“The market is really focused on Spain rather than Portugal, most people think Portugal accessing funding is inevitable,” said Nick Stamenkovic, rate strategist at RIA Capital Markets.

“They are looking for the next victim and the moves in Spanish bonds are a sign of contagion, although we believe the worries about Spain are overdone.” <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Take a Look on euro zone crisis [ID:nLDE68T0MG]

Graphic on euro zone struggle with debt

Graphic comparing debt-heavy euro zone economies

Graphic of euro’s correlation with Greek, Irish bond spreads ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Portuguese 10-year bond yields PT10YT=TWEB, at more than 7 percent, are already above the level at which Ireland and Greece stopped accessing bond markets and well above the roughly 5 percent Lisbon would pay to borrow from the European Financial Stability Facility.

The ECB has concentrated its bond buying on Portuguese debt this week, a trader said, keeping the 10-year yield spread from hitting fresh lifetime highs.

The euro EUR= fell to a two-month low against a broadly recovering dollar, on the peripheral concerns.

December Bund futures FGBLZ0 were 41 ticks higher at 127.70 but the contract was less than a point higher on the week on concerns over how much it would cost euro zone members such as Germany if a larger country such as Spain needed rescuing.

“Bearish intraday sentiment is overstretched after two days of selling and although there is no clear sign that investors’ willingness to sell is exhausted, negative momentum levels have slowed,” said Max Knudsen, technical analyst at PIA First.

“The market seems to have stabilised a bit, but it’s a matter of when it gets hit again really,” one trader said.

Two-year German bond yields DE2YT=TWEB were 5 bps lower at 0.917 percent, with 10-year yields DE10YT=TWEB down about 3 bps at 2.64 percent, falling back below the 200-day moving average.

Additional reporting by Anna Yukhananov