Spain's ten-year borrowing costs increased above 6 percent on Monday ahead of a key debt auction tomorrow, adding to worries over the contagion risk of the sovereign debt crisis and the health of the economy.
The 10-year yield went above the crucial 6 percent level for the first time in four months. The yield rose to 6.15 percent, the highest level since December 2011. Borrowing costs near 7 percent are seen unsustainable, and in the past, countries were forced to seek a bailout.
The cost of insuring Spain's debt hit a record high with the five-year credit default swaps reportedly rising above 510 basis points. The Spanish Treasury is set to auction 12- and 18-month bills tomorrow, and 2- and 10-year bonds on April 19.
Italian bond yield also moved higher on Monday driven by the concerns over Spain. Meanwhile, the yield on the German 10-year bund hit a record low 1.628 percent as investors flocked to safe-haven debt.
The increase in Spanish borrowing costs led to expectations for some kind of a bailout for the embattled euro area nation as analysts fear the government may not be able to overcome its problems on its own. The government has introduced several tough austerity measures.
Some called for the European Central Bank to intervene by buying Spanish bonds. Recently, ECB Executive Board Member Benoit Coeure lifted market expectations for another bond-purchase program from the central bank.
Coeure urged governments to build on the steps already taken to restore sound fiscal positions and support long-term growth in a speech delivered on April 11. The ECB will do whatever it takes to fulfill its mandate of delivering price stability over the medium term, he said.
But, another ECB Board member Klaus Knot said on Friday that there was hardly any reason to restart the ECB's bond purchases.
Last week, Bank of Spain data showed that Spanish banks stepped up their ECB borrowings after the euro area's central bank injected EUR 529.53 billion in three-year loans on February 29, which was the second offering of long-term funds. The first three-year long-term financing operation was held in December.
Cheap ECB funds were tapped by 800 banks and the operation helped reduce yields on Italian and Spanish bonds as investor confidence improved. However, it is believed that the effects of the LTRO has started to wear off now.
by RTT Staff Writer
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