EURO GOVT-Portugal, Spain yields rise as Irish tension grows

* Spanish, Portuguese yields rise, CDS marks record

* Irish bond yield spread widens after ratings cut

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

By Kirsten Donovan

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

Peripheral yield spreadsover German benchmarks widened in
early trading as pressure on Ireland showed signs of spreading
to Spain and Portugal.

The Spanish 10-year government bond yield spread set a
euro-lifetime high of 260 basis points as yields jumped above 5
percent, while the equivalent Portuguese spread touched a
euro-lifetime record of 481 bps. The cost of insuring Spanish
and Portuguese debt against a default also soared.

“The markets now will start disciplining Portugal. Portugal
is the next target,” said BNP Paribas strategist Matteo Regesta.
“Maybe it will have to access the (emergency lending) facility
by, at the latest, the end of the first quarter next year.”

Spreads later contracted from their widest levels as Bunds
sold off sharply, with traders saying investors were buying
Italian and Spanish bonds, while the European Central Bank was
picking up Portuguese paper. Outright yields remained elevated.

Bund futures (FGBLc1: ) settled 116 ticks lower at 127.72,
undoing all of the previous session’s rally after a poorly
received German Bund sale and strong German Ifo data curbed
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.

One trader said that although Tuesday’s rally was overdone,
the complete unwinding of it on Wednesday had left Bunds looking
cheap given the degree of peripheral spread widening this week.

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

Standard & Poor’s cut Ireland’s credit rating to A from AA-
and placed the sovereign on creditwatch negative while Dublin
unveiled a 15 billion euro ($20 billion) four-year austerity
plan on Wednesday that foresees deep spending cuts and tax
increases. [ID:nLDE6AM25A]

But markets were unenthusiastic, with 10-year Irish bond
yields (IE10YT=TWEB: ) pushing back above 9 percent and with the
spread over Bunds widening to as much as 660 basis points.

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 which failed to attract enough bids
to cover the amount on offer [IDnLDE6AN0UJ].

“This demonstrates the lack of demand for German paper at
current low yields, especially after the rally of the past two
days,” Credit Agricole rate strategist Peter Chatwell said.

The 10-year German bond yield (DE10YT=TWEB: ) was 11 bps
higher at 2.662 percent, while the two-year Schatz yield
(DE2YT=TWEB: ) was 4 bps higher at 0.967 percent.

(Graphic by Scott Barber, additional reporting by Emelia
Sithole Matarise)

EURO GOVT-Portugal, Spain yields rise as Irish tension grows