LONDON: Spanish debt suffered for a third straight session on Thursday as the hangover from a weak debt auction earlier in the week stirred worries about the country's ability to tackle its fiscal problems.
Demand for the safety and liquidity of German debt pushed 10-year yields to their lowest since early November and sent the June Bund futures contract to a new high.
Italian and Belgian debt yields also rose as the effect of the flight from lower-rated bonds spread throughout the currency bloc.
Ten-year Spanish yields rose by as much as 14 basis points to hit 5.86 percent and were on course for their biggest weekly rise in a month as Wednesday's below-par bond sale continued to fuel selling.
"There's a lot of concern out there that Spanish lenders are not taking down the supply from Spain at the same pace as they used to in the first quarter," said Gianluca Ziglio, strategist at UBS in London.
"The key is now going to be the next (Spanish) auction on the 19th as confirmation of this trend of weakening capacity to absorb supply by the Spanish banks."
Longer-term concerns over Spain flared up earlier this year when Madrid loosened deficit-cutting targets, and followed up with a budget plan that would push public debt to its highest level in 22 years, leaving investors unimpressed.
"There are structural factors behind this climate in the market. Spain is in a difficult situation because the budget they tried to implement is for a large part composed of one-off measures," said Chiara Manenti, fixed income strategist at Intesa SanPaolo.
SOLID CORE
German Bund futures settled 73 ticks higher on the day at 139.15 having earlier set a new record high for the June contract at 139.38 and closing in on the all-time high set by the March contract at 140.52.
The 10-year German yield sank to 1.72 percent, down 8 bps on the day and threatening to sustain a break out of the range that has survived two major tests since November.
The Bund contract could prove volatile at Tuesday's open, adjusting to any sharp moves in safe-haven bond markets after the release of US non-farm payrolls data on Friday when European markets will be closed. European markets will also be closed on Monday.
With a lack of growth at the heart of the euro zone's problems, confirmation from the US data that the outlook for the world's largest economy remains upbeat could help allay fears that a global slowdown will add to European problems.
"Data in the US is far from signalling a slowing down of the economic cycle. I suspect strong US data could remain quite supportive for the whole euro area," Manenti said.
Looking ahead, in the absence of major economic releases next week, focus will fall on Italy's sales of medium and long-term debt to see if it can overcome negative sentiment and improve on an unconvincing set of BTP auctions last week.
However, even if Italy clears that hurdle and Spanish bonds stabilise in the absence of further budgetary news, the looming French elections mean the likelihood of a selloff in core German debt looks remote.
France sailed through an auction of bonds worth 8.4 billion euros on Thursday, but yields rose going into the sale. As the presidential election approaches analysts expect Paris to face greater scrutiny over its long-term plans to generate growth and reduce debt.
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