LONDON: German government bonds rose on Tuesday with a change of government in Italy failing to stem a rise in the country's borrowing costs, reflecting the huge challenges facing policymakers struggling to contain the euro zone debt crisis.
Italian 10-year bond yields were left above 6.65 percent on Monday, despite European Central Bank bond buying, and the Spanish 10-year yield rose above 6 percent for the first time since August ahead of an auction of the launch of a new 10-year bond on Thursday.
"Contagion is spreading and very quickly and unless the European Central Bank come in and buy bonds on an unsterilised basis -- which there is no sign of them doing - then it's hard to see it stopping," a trader said.
December Bund futures were 29 ticks higher at 138.55 with benchmark 10-year yields down a basis point at 1.78 percent.
Itlian Prime Minister-designate Mario Monti meets the leaders of the country's biggest two parties on Tuesday to discuss the "many sacrifices" needed to reverse a collapse in market confidence that is driving an ever deepening euro zone debt crisis.
Particularly worrying in recent sessions has been the rise in French bond yields -- over 30 basis points in 10-year yields in the last week.
France's inability to make rapid adjustments to its economy is a serious concern and should be ringing alarm bells for the euro zone, according a report issued by the Lisbon Council.
The yield spread of Belgian and Austrian 10-year bonds over Bunds are also at euro-era highs, while the equivalent Dutch spread is at its most since early 2009.