LONDON: Expectations that Spain may eventually need outside help to keep its banks afloat kept its government bond yields close to euro-era highs on Thursday, with no respite seen before a debt auction next week.
Safe-haven German bond prices were steady around their record highs, while French, Belgian and Austrian debt outperformed the rest of the bloc as investors sought higher-yielding bonds that are less risky than Spanish or Italian paper.
Spain has sky-high unemployment, falling housing prices, autonomous regions effectively shut out of debt markets and a ballooning budget deficit. Its banks need financial help, but many in the market believe Madrid may not be able to afford it.
Ten-year Spanish yields were slightly lower on the day in thin trade at 6.66 percent, but stayed close to their highest levels in the euro zone's 13-year history at 6.79 percent, hit in November.
"The levels are definitely worrying, Spain is reaching zones where it is harder and harder to finance itself in the capital market," said Viola Julien, fixed income analyst at Helaba Landesbank Hesse-Thueringen.
"One can remember Portugal or Ireland when they went above the 7 percent mark they had to seek shelter in these (euro zone) rescue funds and market participants are playing this scenario right now."
With Spain due to auction debt next Thursday, yields were more likely to rise than fall in the coming week, Julien added.
The European Commission said on Wednesday it was ready to give Spain an extra year to reduce its budget gap and offer direct aid for its banks from the region's rescue fund. But it is member states who decide whether to adopt such proposals and Germany has so far opposed any collective banking resolution.
As investors are more concerned about keeping their money safe rather than in the return available, German two-year yields remained just above zero percent, with benchmark 10-year Bund yields hovering around their record low of about 1.25 percent.
Such low yields in Germany pushed investors towards countries such as France, Austria or Belgium - tagged by many as semi-core and seen as riskier than the Netherlands or Finland but with higher-yielding bonds.
French, Austrian and Belgian yields were all some 10 bps lower on the day at 2.39 percent, 2.16 percent and 3.11 percent, respectively.
IRISH VOTE
Ireland is holding the only popular vote on Europe's new fiscal treaty on Thursday, with opinion polls pointing to a 'yes' vote that would ensure its access to the ESM rescue fund and save the euro zone from extra trouble.
Markets remain wary of a potential "no" vote and the outcome, which will be known on Friday, may bring some relief for Irish bonds. Ireland's yield curve inverted this week, with short-term debt yields rising more than those on longer-dated debt in a sign of a higher perceived risk of default.
But it is unlikely to bring any lasting respite for Spain or Italy as bigger underlying worries remain.
"I think the Irish will vote 'yes' ... but I can't see why that should be a turning point for the periphery given the woes in Spain and obviously in Greece," one trader said.
A poll on Wednesday showed parties for and against Greece's bailout were very close to each other before a June 17 election that may decide whether Greece stays in the euro zone or not, keeping market uncertainty high.
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