EURO GOVT-Peripheries volatile as contagion doubts linger

* Irish bond yield spread tightens, outperforms peripheries

* Healthy bidding at Spanish auction helps ease sentiment

* Bunds fall on unwinding safety flows

By Paul Day

LONDON, Nov 18 (BestGrowthStock) – Euro zone peripheral bond yields
ended Thursday trading a touch closer to those of German Bunds
on Thursday after a volatile session fuelled by uncertainty over
how far the bloc’s debt crisis would spread.

Expectations of a resolution to Ireland’s debt problems and
a relatively good reception for a Spanish long-bond auction
initially helped shrink the premium investors demanded to hold
Irish, Spanish and Portuguese debt over the Bund.

Debt markets were buoyed earlier by comments by Ireland’s
central bank chief who said he expected Dublin to receive tens
of billions of euros in loans from European partners and the
IMF. [ID:nLDE6AH0HV]

The trend largely reversed through the day however, as
longer-term concerns and uncertainty directed sentiment.

“We got overcooked this morning, considering the Irish news
was already in the price,” a trader said.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Take a Look on Ireland crisis [ID:nLDE68T0MG]

Graphic on euro zone’s struggle with debt

http://r.reuters.com/hyb65p

IFR on Spanish auction [ID:nIFRbrrhlS]

Breakingviews on euro zone peripheral debt [ID:nLDE6AG1MG]

For an interview with Kenneth Broux with Reuters Insider on
Thursday, click http://link.reuters.com/qyk26q

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“I don’t think this market wants to push the boat out too
much in terms of tightening spreads. It’s going to be very
choppy for a while,” Lloyds TSB economist Kenneth Broux said.

“We had an aid package (for Greece) in May and a banking
stress test in July, all aimed at keeping the (problems of the)
peripheries at bay, but they were just a sticking plaster on a
bigger problem.”

According to influential blog Coulisses de Bruxelles
http://link.reuters.com/ryk26q the European Central Bank had
curbed its controversial Treasury buying programme for Ireland
over the last three days to highlight its unhappiness with
Ireland’s dependence on its emergency funding.

For an ECB FOCUS on the programme, click [ID:nLDE6AB0D2]

A trader said the ECB had bought Irish securities on Tuesday
and Wednesday, but not on Thursday.

German Bund yields were also higher, as liquidity seeped out
of the fixed income market. At settlement, Bund futures (FGBLc1: )
were at 127.44 down 100 ticks.

The 10-year German bond yield (DE10YT=TWEB: ) was 2.706
percent, up 10 basis points, while the two-year Schatz yield
(DE2YT=TWEB: ) was 6 bps higher at 1.113 percent.

“We’re seeing a relocation from the fixed income market and
in to equities, which are doing very well today,” RBS economist
Silvio Peruzzo said.

The Irish/German 10-year bond yield spread settled at 566
basis points, 15 bps tighter on the day, while the cost to
insure against Irish default was down 5 bps to 520 bps, pulling
back from initial falls to 485 bps in the morning.

A team from the European Commission, the International
Monetary Fund and ECB arrived in Dublin on Thursday to begin
examining what measures may be needed if Ireland decides to seek
aid.

CDS spreads for Portugal, which many believe could be next
in line to appeal for EU aid after Ireland, tightened by 4 bps
on the day to 410 bps, with 10-year spreads settling at 423 bps,
flat on the day.

The Spanish treasury sold a combined 3.6 billion euros in
10-year and 30-year bonds, in the middle of its 3 billion to 4
billion euros target, but both yields jumped 50 basis points.

“Higher debt servicing costs present a serious risk to the
government already committed to a tough fiscal consolidation
programme,” IHS Global Insight economist Raj Badiani said.

“Clearly, a prolonged and deeper euro zone sovereign debt
crisis could result in Spain’s 10-year bond yield climbing above
5 or even 6 percent in the coming months, leading to a sharper
rise in debt servicing costs in 2011 and 2012.”

Spain aims to slash its public deficit from 11.1 percent of
gross domestic product in 2009 to 3 percent of GDP by 2013.

Meanwhile, France sold almost 8 billion euros of short-dated
debt, drawing bids for more than twice the amount at average
yields at 2 percent and below.[ID:nLDE6AH10Y]

(Additional reporting by Kirsten Donovan; Editing by Ruth
Pitchford)

EURO GOVT-Peripheries volatile as contagion doubts linger