November 22, 2011 / 5:31 PM / 8 years ago

EURO GOVT-Spain bill yields soar, pressuring periphery

* Spanish bond yields rise after debt auction
    * New Spanish govt needs to outline new measures: Fitch
    * Belgian yields soar on political deadlock, contagion

    By Emelia Sithole-Matarise and Ana Nicolaci da Costa	
    LONDON, Nov 22 (Reuters) - Spain's borrowing costs
surged at an auction of short-term debt on Tuesday, keeping
investors on edge and pushing up yields on peripheral euro zone
government bonds on scant signs of political initiatives to
tackle the debt crisis.	
    Belgian government bond yields also jumped as ongoing
political deadlock in the country fuelled worries about its
ability to brave a crisis that is entering its third year and
now impacting less risky countries like France.	
    Spain paid the highest interest in 14 years to sell
short-term debt in an auction seen as a test of investor
sentiment after the centre-right Popular Party won an election
on Sunday. The average yield for a three-month bill more than
doubled to just over 5 percent from almost 2.3 percent a month
earlier and yields were higher in the secondary market.
    Fitch Ratings said the new government must surprise markets
with a radical fiscal and structural reform programme if it is
to improve expectations of its capacity to grow and cut debt
within the confines of the euro zone. 	
    "It doesn't look great, the continuing trend towards ever
higher yields to get anything done, it has to be concerning,"
said Gary Jenkins, head of fixed income at Evolution Securities.	
    Yields on Spanish 10-year bonds were up 4.7
basis points on the day at 6.64 percent, on five-year paper they rose 16 basis points to 6.11 percent and two-year
bond yields jumped 16 basis points to 5.9 percent.	
    The 10-year yield was 22 bps from converging with that of
Italy. Some strategists expect it to go back to trading at a
premium over Italian debt as investors assess the new Spanish
government's commitment to an austerity programme.	
    The spread between the bid and ask price on 10-year Italian
bonds has widened sharply since October from around 25 cents to
110 cents, suggesting the market is becoming more illiquid.	
    Italian two-year yields jumped 44 bps on the day to 7.03
percent, rising back above those of 10-year BTPs, reflecting
renewed investor fears that they may not get their money back.	
    The 2/10-year yield curve had been trading normally over the
past couple of weeks as shorter-dated yields fell back below
longer maturities on guarded optimism that a new Italian
government could do more to pursue fiscal tightening measures.	
    The move higher in Italian yields came even as the European
Central Bank was seen buying short-term Italian bonds, according
to three traders.BELGIAN WOES	
    Ten-year Belgian government bonds underperformed the rest of
the euro zone sovereign debt in that maturity, with two traders
saying the political deadlock in the country and the prospect of
supply next week had weighing on bond prices. 	
    Belgian 10-year government bond yields soared
27 basis points to 5.10 percent -- having hit its highest since
2002 at 5.11 percent -- one day after the lead negotiator in
Belgium's drawn-out government formation tendered his
resignation after talks for a 2012 budget ground to a halt. The
move threatens to derail the country's near 18-month search for
a new administration.  	
   "It could be a strategy to try and strong-arm the opposing
parties to come to some form of agreement perhaps, but it
potentially is a worrisome development because (nobody will be
controlling the process) if that strategy backfires," Richard
McGuire, rate strategist at Rabobank said.	
    "The system is in ever increasing crisis mode and the leeway
for delaying (action) is limited to say the least given the
elevated nature of yields in the Spanish and Italian debt
markets. Spain and Italy are very close to being effectively
shut out of the market."	
    Not only are yields on Italian and Spanish 10-year bonds
hovering close to a psychologically important 7 percent level,
beyond which funding costs are perceived to be unsustainable but
there are signs that contagion is spreading to less risky,
triple-A sovereigns.	
    Ten-year French government bond yields were up
6.2 basis points at 3.5 percent and the Austrian equivalent
 rose 9.2 basis points to 3.52 percent.	
    Despite the backdrop, German Bund futures only
settled 10 ticks higher at 137.25.	
    Gnawing at sentiment, Jefferies Group Inc became the
latest bank to cut its holdings of debt of Europe's struggling
states, saying late on Monday it had reduced its exposure by a
further 50 percent. 	
    Jefferies executives said the company had reduced gross
exposure to debt of Greece, Ireland, Italy, Portugal and Spain
by a total of nearly 75 percent since early November and now has
a net short position of $134 million in those countries' bonds.
    Traders and strategists said this trend was likely to
continue with banks looking to lighten their exposure to risk
going into year-end.
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