Spain's benchmark 10-year yield hit a euro-era record of 7 percent, while Italy saw no respite from rising borrowing costs in the debt market on Thursday.
Investors are increasingly concerned about the outlook for peripheral euro zone nations despite a EUR 100 billion bailout for Spain's banking sector.
Caution also prevails ahead of the crucial election in Greece on June 17, the outcome of which could decide whether or not the country would leave the euro area. The risk of contagion from a possible 'Grexit' to the rest of euro area remains high and European policymakers are exploring ways to reduce the impact of any fallout.
The Italian treasury sold a total EUR 4.5 billion of its longer-term debt today, including a three-year bond or BTPs. The agency was aiming proceeds between EUR 2.75 billion and EUR 4.5 billion.
The yield on the 2.50 percent March 2015 bond climbed to 5.30 percent from 3.91 percent in the previous sale on May 14. Analysts had widely expected the yield to come in above 5 percent. Demand, however, improved slightly with the bid-to-cover ratio rising to 1.59 from 1.52. The country sold the maximum EUR 3 billion of the bond.
Thursday's sale, which was the first auction of Italian bonds after the Spanish banking bailout, came just a day after Moody's downgraded Spain by three notches to just above junk, serving another blow to the currency-bloc battling the debt crisis. Cyprus, which is also rumored to be in need of a bailout, was also downgraded.
The euphoria that followed a bigger-than-expected bailout over the weekend was entirely nullified by Monday and Spanish borrowing costs started climbing steadily. Further, Spanish banks' net borrowings from the European Central Bank rose to a record high in May, data from Bank of Spain revealed Thursday.
The Spanish 10-year bond yield hit a euro-era record 7 percent on Thursday, while the Italian 10-year yield was close to 6.30 percent. Yields above 6 percent are seen unsustainable and markets remain concerned that Italy would be the next in line to seek a bailout.
Egan-Jones Ratings Company also downgraded Spanish debt ratings to CCC+ from B on Wednesday, pushing the country's ratings deeper into junk. On June 7, Fitch Ratings cut Spain's rating by three notches to BBB.
Italy also sold 4.25 percent February 2019 off-the-run BTP at yield of 6.10 percent, which was higher than the 5.21 paid in the previous sale on April 27. The 4.25 percent March 2020 debt was placed at yield 6.13 percent, up from 5.33 percent in the previous tap on May 14. Investors bid around 1.8 times for both bonds.
Germany too saw a modest increase in borrowing costs on Wednesday as investors cast doubt on its safe-haven status. Speaking to the German Parliament today, Chancellor Angela Merkel urged other euro nations not to overestimate Germany's ability to fight the crisis. The country's "strength is not unlimited," she said.
Reiterating her opposition to any quick solution to the crisis, Merkel said quick fixes such as joint liabilities are "counterproductive." Calling for more regulatory powers for the European Central Bank, she said "stress tests" for European banks conducted last year had been a failure, citing the Spanish banking crisis.
Euro area debt crisis will be the main topic of discussion in the upcoming G20 meeting in Mexico next week, Merkel added.
by RTT Staff Writer
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