EURO GOVT-Portugal, Spain yields rise after Irish downgrade

* Moody’s downgrades Ireland to BAA1 from AA2

* Spreads between German yields and peripherals widen

* Bunds follow U.S. Treasuries higher after New York rally

(Adds quote, adds sovereign spread and CDS info, updates prices)

By Emily Flitter

LONDON, Dec 17 (BestGrowthStock) – German debt prices rose on Friday
while other Euro zone countries’ bonds cheapened after Moody’s
slashed Ireland’s credit rating and European leaders took no new
immediate steps to deal with a still broadening debt crisis.

Moody’s cut its evaluation of Ireland by five notches to
Baa1 and warned further downgrades could follow if Dublin was
unable to stabilise its debt situation.

“The Irish downgrade was significant and severe,” said Nick
Stamenkovic, bond strategist at RIA Capital Markets in
Edinburgh.

“The timing of it is a bit of a surprise, since Ireland has
just passed the bailout. The decision by Moody’s is very
procyclical.”

Spreads between Bund yields and the debt yields for the
countries seen as next in line in Europe’s debt crisis, such as
Spain and Portugal, widened as investors sold their bonds.

“The market’s very much got Portugal and Spain in its
sights,” Stamenkovic said. “The market’s in a pretty jittery
mood.”

Irish 10-year government bond yields (IE10YT=TWEB: ) rose 25.5
basis points to 8.696 percent, pushing the yield spread over
German Bunds to 567 bps, about 25 bps wider on the day. The
Portuguese/German spread widened about nine bps to 364 bps.

The cost of insuring those countries’ bonds against default
rose. Credit default swaps for Ireland were 15 basis points
higher compared to Thursday, while prices for Spain and Portugal
were up seven basis points and 13 basis points, respectively.

NOTHING NEW

European Union leaders agreed on Thursday to create a
permanent financial safety net from 2013 and the European
Central Bank moved to increase its firepower to fight the debt
crisis that has rocked the euro zone. [ID:LDE6AE0V2]

But there was nothing for the short term to help countries
struggling to manage their fiscal affairs and persuade bond
markets to stop pushing yields up.

The ECB, in charge of monetary policy in the 16-nation euro
area, will almost double its capital to 10.76 billion euros to
cope with bigger credit risk and market volatility. Euro zone
members will provide the increase. [ID:nLDE6BF1M4]

That too looked like a defensive measure and there was no
reason to believe the bank was planning to step up its purchases
of Portuguese, Spanish or other debt — but some players saw it
as supportive.

“It’s a material, added commitment by the ECB. It just shows
that they’re here to support the Euro crisis,” said Orlando
Green, European fixed income strategist at Credit Agricole CIB
in London.

Traders said market volume was generally thin as the
year-end approached.

Bunds also got a boost from U.S. Treasury prices, which
rebounded in New York on Thursday.

Buyers scooped up U.S. Treasuries, which had cheapened to
relatively attractive levels following a sell-off that lasted
several days and drove the U.S. 10-year yield to seven-month
highs.

Cyril Beuzit, head of interest rate strategy at BNP Paribas
in London, said Bunds might see a similar rebound, but it was
too early to tell.

“At best what we can expect is a kind of stabilization
around the 3 percent area,” he said.

At 0805 GMT, the Bund future (FGBLc1: ) was up 54 ticks at
124.41. The 10-year Bund yield was down 4.8 basis points at
3.019 percent. The Schatz yield fell 1.2 basis points to yield
1.067.

(Editing by Patrick Graham)

EURO GOVT-Portugal, Spain yields rise after Irish downgrade