November 21, 2011 / 5:12 PM / 9 years ago

EURO GOVT-Spanish yields rise, no respite from election result

* Spanish yields rise after election, seen rising further

* Markets pressure euro zone, ECB to provide powerful backstop

* Bunds rise, but most spreads over Bunds widen

By Kirsten Donovan and Marius Zaharia

LONDON, Nov 21 (Reuters) - Spain’s bond yields rose on Monday, despite a clear-cut victory for austerity-committed conservatives in Sunday’s election, as the crisis appeared to be hitting the heart of the euro zone and investors sought refuge in Germany.

Yields on Italian and Belgian government bonds also rose as the whole euro zone periphery stayed under pressure. In a sign of contagion to countries once seen as safe, French yields rose briefly after a Moody’s warning about its credit rating.

Spain’s centre-right Popular Party won Sunday’s election but there was little detail on Prime Minister-elect Mariano Rajoy’s plans.

Analysts say only a major increase in European Central Bank bond buying can ease the pressure. Italy, the third-largest debt market in the world, is facing a bond sell-off, and investors fear it could drag France and other countries heavily exposed to it into the crisis.

“The real pinch-point is the problem between France and Italy,” said Richard Jeffrey, Chief Investment Officer at Cazenove Capital Management, which manages 15 billion pounds of assets.

“Germany need to understand that they need to take the risk with inflation. If they don’t ... then the risk is that the whole system will implode.”

Germany opposes full-blown ECB intervention in Europe’s debt crisis, at odds with some European partners and Britain over whether the central bank should act more forcefully.

Spanish 10-year government bond yield spreads widened around 30 basis points on the day to a session high of 475 bps, before settling at 468 bps, with traders citing some ECB buying in the afternoon.

Italian and other euro zone spreads versus Bunds were wider on the day.

No longer-dated peripheral bond sales are due this week, although there were signs of early concession building before auctions from Spain, Italy, France and Belgium next week.

Spanish bonds may get some respite if the People’s Party acts fast to shore up investor confidence , although the impact is likely to be limited.

“It looks like a case of ‘buy the rumour, sell the fact’. The outcome of the election was as expected,” said a trader.

“But the fact is they are very vague on economic plans... There is plenty of scope for disappointment.”

Spanish 10-year bonds, which had outperformed their Italian equivalent since mid-June, underperformed markedly in the last two weeks. Spanish yields rose to within 15 bps of Italy’s, compared with 140 bps earlier in November.

“If the situation in the euro zone government bond market deteriorates further, the advantage Spain built up over the last months with its progress and credibility in the implementation of austerity measures could be fading further compared with Italy,” said RBC Capital Markets strategist Norbert Aul.

“Spanish and Italian bond yields could converge further.”

December Bund futures were 82 ticks higher on the day at 137.32.

FRANCE

The premium investors demand to hold 10-year French bonds rather than Bunds rose to around 174 bps, before ECB buying of Spanish and Italian bonds sent it back below 160 bps.

Moody’s warned the recent rise in interest rates could be negative for France’s credit rating.

“Moody’s warning... highlights the risk of the region being systemically downgraded,” said Rabobank rate strategist Richard McGuire. “The elevated nature of borrowing costs across an increasing swathe of the euro zone threatens to put all ratings under pressure regardless of individual country fundamentals.”

France’s banks, heavily exposed to the periphery, borrowed more than 100 billion euros from the ECB last month, up around 20 billion euros from the previous month.

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