Italian, Spanish yields near one-month highs

LONDON: Yields on Italian and Spanish government bonds rose to near one-month highs on Monday as pressure increased on Italy -- the euro zone's third largest economy -- to get its fiscal house in order.

Italian 10-year yields rose to their highest since Aug. 9 at 5.467 percent, pulling away from the 5 percent level to which European Central Bank buying had pushed them.

Investors will scrutinise weekly data showing how much the ECB spent on Italian and Spanish bonds to see how committed it is to a policy aimed at keeping their yields affordable.

Italian 10-year yields last stood up 13.1 basis points at 5.42 percent, with markets increasingly frustrated over Rome's efforts to pass a new austerity package. Two traders said the ECB was checking prices.

Spanish yields also rose to their highest in almost a month at 5.328 percent. They were last up 4.1 bps at 5.18 percent.

Europe faces a string of political and legal tests this week that could hurt efforts to resolve the debt crisis. . This backdrop, along with worries that the US economy could fall back into recession, took benchmark 10-year German yields to fresh record lows.

"We have got a few events this week which are likely to ensure that peripheries remain under pressure," Richard McGuire, rate strategist at Rabobank, said.

This week, Germany's Constitutional Court will deliver its ruling -- awaited for over a year -- on claims Berlin is breaking German law and European treaties by contributing to multi-billion euro bailouts of Greece, Ireland and Portugal.

The finance ministers of Germany, the Netherlands and Finland will also meet to discuss the nagging issue of collateral for loans to Greece.

Debate over the effectiveness of ECB bond-buying is likely continue at the bank's monthly policy meeting on Thursday.

"We will probably get the ... assertion that 'all euro zone countries must stick to their fiscal plans as agreed with the euro zone authorities'," McGuire said, referring to the ECB news conference on Thursday.

"Singling out Italy -- there is a risk that that would be counterproductive because it would put Italian yields under significant pressure and therefore undo much of the work that the ECB has done."

ONE-WAY TRAFFIC

Worries over the euro zone, along with fears over the world's largest economy, drove German Bund futures to new record highs and market participants expected them to keep on rising.

Data on Friday showed US job growth ground to a halt in August, renewing worries of a fall back into recession.

Growth in the euro zone's dominant service sector eased for the fifth consecutive month in August, expanding at its weakest pace in two years.

The German Bund future hit a record high at 137.73 and last traded up 95 ticks on the day at 137.59.

"It's uncharted territory. The market may start to look vulnerable at these record levels, but as long as the news flow remains supportive for safe havens, as long as the sentiment remains risk-averse, low (German bond) yields can fall even further," Rainer Guntermann, strategist at Commerzbank said.

Ten-year German yields were 7.6 basis points lower at 1.91 percent having hit a historic low of 1.89 percent.

"It's ... a general move away from risk assets," a trader said, pointing to a near 3 percent fall in European stocks. "It's one-way traffic in pretty thin volumes and no one is ready to oppose it."

Copyright Reuters, 2011