EURO GOVT-Portugal, Spain pressured as Irish tension spreads

* Spanish, Portuguese yield spreads rise, CDS at record

* Irish bond yield spread widens after ratings cut

* Bunds fall after Ifo data, 10-year Bund auction falters

By William James

LONDON, Nov 24 (BestGrowthStock) – Investors ditched peripheral euro
zone bonds on Wednesday as Ireland’s debt crisis hit confidence
in the currency bloc’s higher-yielding paper, while a rally in
Bunds unwound and a German auction drew tepid demand.

Peripheral euro zone bond yield spreads widened as pressure
on Ireland showed signs of spreading to Spain and Portugal.

“The fear in bond markets is now being concentrated on the
Iberian peninsula,” said Philip Shaw, economist at Investec.

The Spanish/German 10-year government bond yield spread set
a euro-lifetime high of 260 bps, the equivalent Portuguese
spread touched a a euro-lifetime record 481 bps and the cost of
insuring Spanish and Portuguese debt against a default rose to
new highs at 311 bps and 510 bps respectively.

The Irish/German spread widened to 645 basis points after
Standard and Poors cut Ireland’s credit rating to A from AA- and
placed the sovereign on creditwatch negative.

Spreads later contracted slightly from their widest levels,
with traders citing European Central Bank bond buying.

Bund futures (FGBLc1: ) hit a low of 128.19, down 69 ticks,
with falling yields curbing demand at the sale of a new 10-year
bond, and strong German Ifo data curbing safe-haven flows.

“The German economy proves to be very strong which is
Bund-negative… and there’s not a lot of enthusiasm to hold
euro whether it be Bunds or anything else,” said Marc Ostwald,
strategist at Monument Securities.

Tension was also evident in currency markets, with the euro
falling to two-month lows against the dollar. [FRX/]

“To see where the Bund goes from here, you need to watch
peripheral spreads, and watch the currency – and the equity
markets and bank shares,” a trader said.

Ireland will unveil at 1400 GMT a budget plan explaining how
it plans to save 15 billion euros over the next four years, but
market participants said this was unlikely to ease tension.

“Even though the government has committed itself to reducing
the budget deficit over the medium term, the market doesn’t
believe its growth forecasts beyond 2011 are credible,” said
Nick Stamenkovic, strategist at RIA Capital Markets.

“The real concern for the markets is the banks. That’s part
of the problem in Ireland and then investors start to worry
about not just banks in Portugal, but in Spain as well.”

The 10-year Italian bond yield (IT10YT=TWEB: ) briefly hit its
highest since early May at 4.391 percent.

For a graphic on peripheral CDS curves, see


Dealers said the recent flight into Bunds had pushed yields
to an unattractive level, resulting in a weak performance at a
4.764 billion euro debt sale. The sale received the lowest
bid-cover ratio since February 2009, Credit Agricole rate
strategist Peter Chatwell said.
“This demonstrates the lack of demand for German paper at
current low yields, especially after the rally of the past two
days,” he said.

The 10-year German bond yield (DE10YT=TWEB: ) was 5.7 basis
points higher at 2.609 percent, while the two-year Schatz yield
(DE2YT=TWEB: ) was 1 bps lower at 0.934 percent.

The Portuguese/German yield spread exceeded 450 basis
points, raising the possibility that clearing house LCH.Clearnet
could hike the margin call on the debt for repo transactions.

Irish bond markets recoiled, pushing the spread against
Bunds to a new high, when LCH.Clearnet hiked the margin
requirement required on Ireland’s debt by 15 percent of net
exposure on Nov. 10.

The clearing house’s risk policy identifies a spread of
above 450 bps over AAA sovereign benchmark debt as the level
which may increase the margin required when using government
bonds to raise finance through its repo clearing service.

(Graphic by Scott Barber, additional reporting by Anna

EURO GOVT-Portugal, Spain pressured as Irish tension spreads