November 17, 2011 / 6:36 PM / 9 years ago

EURO GOVT-Spanish yields up after auction, ECB intervenes

* French, Spanish spreads over Germany hit euro-era highs
    * Spanish auction sees yields at dangerous levels
    * ECB bond purchases take Italian, Spanish yields off highs

    By Marius Zaharia and Ana Nicolaci da Costa	
    LONDON, Nov 17 (Reuters) - The premium of Spanish over
German Bunds hit fresh euro era highs on Thursday after poor
demand at a Spanish debt sale raised fears that the euro zone
crisis could spiral out of control and potentially lead to a
break-up of the bloc.	
    Spain saw its borrowing costs rise to their highest since it
joined the euro, close to the psychologically important level of
7 percent seen by many as a point beyond which funding becomes
    Ten-year Spanish government bond yields had come off their
highs by late trade and Italian yields turned lower as the ECB
intervened and Italy's new prime minister pledged additional
economic reforms.  	
    But signs that contagion is spreading to the so-called core
Europe -- French premiums over German Bunds also hit a euro-era
high -- are increasing pressure on policymakers to ramp up
action to tackle the crisis.	
    "It is another nervous day and certainly not helped by the
auctions. The fact that contagion has spread to the core does
suggest that markets are more concerned about a break-up," said
Philip Shaw, chief economist at Investec. 	
    "What investors are asking is what is the end-game? How can
one of the authorities solve the crisis, who is going to do it
and so far we have no answers."	
    The Spanish/German 10-year yield spread hit
its highest level since the launch of the euro above 500 basis
points after Spain payed a high rate to sell its 10-year debt
ahead of a parliamentary election on Sunday. 	
    Ten-year Spanish government bond yields rose
as far as 6.82 percent before retracing to 6.5 percent in late
trade, still up on the day.	
    "(It was a) very poor Spanish auction which will heighten
concerns the door to Spain being able to sustainably finance
itself is closing," Richard McGuire, strategist at Rabobank
    "This, in turn, stands to further expedite the convergence
of Spanish yields with those of Italy as the country plays
catch-up with its more troubled peer. Most troublesome, though,
is the hugely elevated yield necessary to ensure even this
lacklustre outcome."	
    The 10-yr Italian government bond yield premium over the
Spanish equivalent fell to its tightest in two months and
further tightening was expected before the elections.	
    "This may well underpin the negative news flow in respect to
the situation of the peripheral government bond markets,"
Commerzbank strategist David Schnautz said.	
    Ten-year Italian government bond yields were
at 6.9 percent, off the day's high of 7.3 percent but still near
levels considered unsustainable.	
    "There has been very aggressive ECB buying since lunch,"
said one trader.	
    New Italian Prime Minister Mario Monti on Thursday promised
rigour and fairness in painful reforms to dig the country out of
a financial crisis.  	
    The French/German 10-year yield spread 
 rose to 206 basis points for the first time since
the launch of the euro before falling back to 177 basis points
in late trade, with one trader citing short covering.	
    An auction of French debt saw France's cost of borrowing
over two and four years jump by around half a percentage point,
reflecting growing concerns it may be dragged into the euro
zone's sovereign debt crisis.  	
    Calls for the ECB to take a greater role in tackling the
crisis has intensified in recent days as bond selling pressure
spread to countries such as France that used to benefit from
safe-haven flows. Paris argues the central bank should intervene
more forcefully. 	
    Germany and the ECB itself oppose that view.	
    "Clearly at the moment the ECB is reluctant to do anything,"
said Nick Stamenkovic, bond strategist at RIA Capital Markets.  	
    "But if contagion seems to mount and we see a fully fledged
credit crunch in euroland and a deep recession then I think the
ECB needs to do something."	
    German government bonds have benefited from the recent bout
of worries but an improvement in U.S. data gave market
participants an opportunity to take profit, with the German Bund
future settling down 83 ticks on the day at 137.32.	
    New claims for U.S. jobless benefits hit a seven-month low
last week and permits for future home construction rebounded in
October, the latest data to suggest the economy was gaining
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