Spanish and Italian 10-year bond yields rose on Monday, while Germany's cost of borrowing declined, as investors fled to safe havens ahead of a summit of Eurozone finance ministers later in the day.
Surging borrowing costs indicate that markets remain doubtful over the prospects of the currency bloc even after EU leaders struck a crucial deal last week. Further, it also suggested that the European Central Bank's move to cut interest rate to a record low did little to improve market sentiment.
Spain's 10-year benchmark yield rose to above 7 percent, a level seen unsustainable. Previously, Ireland, Greece and Portugal were forced to seek bailouts after borrowing costs crossed this threshold.
Similarly, Italy's 10-year bond yield climbed to 6.13 percent. The pressure was more on the shorter-dated paper. Spanish and Italian two-year yields climbed nearly 20 and 30 points, respectively.
Meanwhile, the yield on Germany's 6-month treasury discount paper or Bubill dropped to negative territory at an auction on Monday.
The country sold EUR 3.290 billion of the 6-month paper due January 2013 against a target of EUR 4 billion, the Bundesbank said. The auction received bids totaling EUR 5.480 billion.
The yield dropped to a record low -0.0344 percent from 0.0070 percent at the previous sale on June 11. The lowest price of the security was 100.01. The bid-to-cover ratio, which reflects demand, rose to 1.7 from 1.2 in June.
The Eurogroup meeting is of special significance to Spain and Italy as finance ministers are set to discuss further the measures agreed by the EU leaders on June 29 that includes relaxed bailout rules, steps for more integration, and permitting the Eurozone rescue funds to directly re-capitalize banks.
The deal has already ran into hurdles with Finland voicing opposition to sharing the debt of other members of the currency bloc. The country, among the few euro area members still having triple-A credit rating, has said it will block any move by the permanent rescue fund European Stability Mechanism to buy bonds in the secondary market.
The Netherlands, also holding the triple-A rating, has also raised doubts over the provision to allow the ESM to make bond purchases.
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