January 5, 2012 / 4:45 PM / 8 years ago

EURO GOVT-Bunds prosper as debt problems mount for euro zone

* Bunds rally; risk appetite cracks as debt woes mount

* Spain, Italy lead underperformance, yields up 15-20 bps

* France sells bonds but triple-A debt under pressure

By William James

LONDON, Jan 5 (Reuters) - Safe-haven German debt rallied on Thursday while bonds issued by almost all other euro zone sovereigns faced pressure as the scale of the region’s debt and economic problems took its toll on investor sentiment.

Spain and Italy, both facing debt auctions next week, were the hardest hit with benchmark bond yields rising by 15 to 20 basis points despite the European Central Bank buying bonds in the secondary market.

Elsewhere in the bloc, France found solid demand for its bonds at auction but Austrian debt suffered over exposures to Hungary while Greece’s debt woes threatened to boil over again.

“Markets are now reflecting the underlying sentiment and remain very nervous,” said Niels From, chief analyst at Nordea.

“There are several focal points. There is Spain with problems in the regions and the banks... there are still a lot of outstanding issues regarding Greece... and that’s only two of many.”

German Bund futures rose 70 ticks to 138.79 while benchmark Spanish yields were 18 basis points higher on the day at 5.66 percent

Spanish government bonds have underperformed their euro zone counterparts this week after the country’s economy minister said the public deficit for 2011 may be higher than the 8 percent of GDP forecast by the new government..

“Spain has really been the main mover at the start of the year,” a trader said. “A lot of people seem to be putting on shorts there, maybe betting on a paring back of the Spanish Italian spread a little bit.”

A delayed debt repayment by the Spanish region of Valencia and a report banks will need to raise extra funds added to the deteriorating sentiment.

Italian 10-year government bond yields were 16 bps higher on the day at 7.12 percent, with traders reporting only modest intervention from the ECB to slow the rise.

TRIPLE-A OK?

France, whose triple-A credit rating is under threat and is seen at a greater risk of contagion from the euro zone debt crisis than Germany, cleared its first supply hurdle of the year, selling 7.96 billion euros of bonds.

“Given the clear risk of an imminent ratcheting up of market tensions as Italy’s February-April redemption hump looms closer, today’s sales should be seen as a successful battle rather than in any way determining the outcome of the war,” said Rabobank rate strategist Richard McGuire.

Despite the result, French bond yields ended the day 4 bps higher at 3.37 percent — a yield 152 bps higher than that on fellow triple-a sovereign Germany, with the market already pricing in a rating cut from agency Standard and Poor’s.

Greece also came back into the spotlight with key aid payments being pushed back and Prime Minister Lucas Papademos calling for more sacrifices to secure the country’s euro zone status and avert a default.

The general malaise swept across the region with Belgian yields up 17 bps and Austrian debt underperforming their triple-A counterparts as yields rose by 11 bps.

There are concerns over the latter country’s exposure to Hungary where the government has fallen out with the International Monetary Fund. The cost of insuring against an Austrian credit default was at its highest level since the end of November.

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