November 23, 2011 / 9:56 AM / 8 years ago

EURO GOVT-Political deadlock, Dexia talk hit Belgian debt

* Belgian/German spreads hit euro-era highs on political deadlock

* Weak data in major economies revive recession fears

* Talk about Dexia deal fuels worry about France’s rating

* Upcoming German 10-year auction limits Bund gains

By Marius Zaharia

LONDON, Nov 23 (Reuters) - The yield premium of Belgian 10-year government bonds over German Bunds hit euro-era highs on Wednesday after a blow to prospects of forming a government left the country vulnerable to a fast-spreading debt crisis.

The highly-indebted country, which has been without a government for 18 months, suffered a further blow on Tuesday when its lead negotiator in forming an administration resigned.

Prospects of further political deadlock along with renewed talk about a bailout deal reached between Belgium and France on jointly-owned bank Dexia brought Belgium into focus.

Reports the two countries were seeking fresh talks on the deal raised concerns that their fiscal burden will get heavier and that France may lose its triple-A rating.

Belgian 10-year government bond yields rose 10 basis points on the day to 5.19 percent, pushing the spread over German benchmarks to a euro-era high of 330 bps. The equivalent French spread was 16 bps wider at 179 bps.

“Belgium has been the funny one ... it was supposed to be the next weakest after Spain. Because euro zone problems are bigger than Belgium no-one worried about it but with the banking collapse and now the issues over that, people are taking Belgium seriously,” Rabobank rate strategist Lyn Graham-Taylor said.

“If the negative news continues you can see a gradual yield widening (towards Italian and Spanish levels) over the next three or four weeks.”

Belgium is scheduled to issue bonds with maturities between seven and 30 years on Monday, but the sales are pre-financing for 2012 as it has already met its 2011 funding target.

“It will now be tough to get the Belgian 10-year yield back below this 5 percent level given the current tough backdrop in both Belgium politics and the ... crisis,” ING’s head of investment grade debt strategy, Padhraic Garvey, said.

Italian 10-year yields rose 13 bps to 7.01 percent, while Spanish 10-year yields rose 5 bps to 6.89 percent.

SAFE -HAVEN FATIGUE

Bund futures initially rose but reversed gains after trader said the European Central Bank was buying short-dated Italian and Spanish debt. The December contract was last down two tick at 137.23.

Germany plans to issue up to 6 billion euros of new 10-year Bunds later in the day. Low yields have seen recent auctions attract less demand than the amount on offer. If the Bundesbank retains a large portion of the sale, this could indicate diminishing potential for Bund yields to hit new lows.

“Look for the Bundesbank takedown to approach 1 billion (euros), but anything more than this should be viewed as a point of weakness in the auction,” Garvey said.

If the euro zone crisis worsens, some investors may even switch out of Bunds into U.S. Treasuries and UK gilts in a bid to prepare for the worst scenario, a euro zone break-up.

“Germany is suffering a bit from almost a safe-haven fatigue,” Rabobank’s Graham-Taylor said.

“A little bit is people switching out of Europe maybe, the other bit is that yields are so low that you could argue that that if you think the ultimate solution is going to be a fiscal union you are almost better off going long Italy.”

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