LONDON: Spanish bond yields eased on Thursday, but remained close to their highest levels in the history of the euro zone as markets expect the Madrid government to eventually ask for outside help to bail out its banks.
Markets become more volatile when yields hit the top of their historic range as some investors think policymakers could come up with measures to cool off the pressure. But with a Spanish debt auction scheduled for next week, yields look more likely to rise than fall in coming days, analysts say.
Spanish 10-year yields were 15 basis points lower on the day at 6.55 percent, having hit a six-month high of 6.72 percent on Wednesday, within a whisker of their euro-era high of 6.79 percent hit in November.
"If you take all the noise out, those yields have traded within a 5-6.7 percent range in the past 2 years, so when you get to the top of the range some people will always be happy to book their profits as they are wary of some sort of policy response," one trader said.
The previous wave of the crisis in November was tempered by the European Central Bank, which injected around one trillion euros of cheap loans into the banking sector over the following months.
That sent yields below 5 percent early this year. But with Spain struggling with sky-high unemployment, banks in need of financial help, autonomous regions shut out of debt markets and a bloated budget gap, it is little surprise they bounced back.
"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."
URGED TO ACT
Adding to growing pressure for dramatic policy action at next month's EU leaders' summit, European Central Bank president Mario Draghi urged politicians to spell out a plan to dispel doubts about the future of the currency union.
He spoke of joint support for banks and governments giving up some of their sovereignty. The European Commission, which can only propose new measures, said on Wednesday it was ready to give Spain an extra year to reduce its budget gap.
But analysts were pessimistic that any of these proposals were around the corner.
"They may come, but not tomorrow ... The bigger question meanwhile is who will buy Spanish bonds from now on?," KBC strategist Piet Lammens said.
With this question echoed by many trading desks around the globe, investors have become more concerned about keeping their money safe rather than what their profit is going to be.
Money kept pouring into Germany, whose two-year yields remained just above zero percent and 10-year yields hovered around record lows of about 1.25 percent.
Such low yields in Germany also 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 and Austrian yields hit record lows of2.61 percent and 2.13 percent, respectively.
IRISH VOTE
Ireland is voting 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," a second 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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