April 5, 2012 / 4:22 PM / 5 years ago

EURO GOVT-Spain toils as debt worries escalate; Bunds rally

* Spanish bond yields rise, threaten fresh crisis bout
    * Bund yields hit a five-month low, break technical range
    * Italian auction in focus next week, strong auction key

    By William James	
    LONDON, April 5 (Reuters) - Spanish debt suffered for a
third straight session on Thursday as the hangover from a weak
debt auction earlier in the week stirred worries about the
country's ability to tackle its fiscal problems.	
    Demand for the safety and liquidity of German debt pushed
10-year yields to their lowest since early November and sent the
June Bund futures contract to a new high. 	
    Italian and Belgian debt yields also rose as the effect of
the flight from lower-rated bonds spread throughout the currency
bloc.	
    Ten-year Spanish yields rose by as much as 14 basis points
to hit 5.86 percent and were on course for their
biggest weekly rise in a month as Wednesday's below-par bond
sale continued to fuel selling.	
    "There's a lot of concern out there that Spanish lenders are
not taking down the supply from Spain at the same pace as they
used to in the first quarter," said Gianluca Ziglio, strategist
at UBS in London.	
    "The key is now going to be the next (Spanish) auction on
the 19th as confirmation of this trend of weakening capacity to
absorb supply by the Spanish banks."	
    Longer-term concerns over Spain flared up earlier this year
when Madrid loosened deficit-cutting targets, and followed up
with a budget plan that would push public debt to its highest
level in 22 years, leaving investors unimpressed.	
    "There are structural factors behind this climate in the
market. Spain is in a difficult situation because the budget
they tried to implement is for a large part composed of one-off
measures," said Chiara Manenti, fixed income strategist at
Intesa SanPaolo.	
    	
    SOLID CORE 	
    German Bund futures settled 73 ticks higher on the day at
139.15 having earlier set a new record high for the June
contract at 139.38 and closing in on the all-time high
set by the March contract at 140.52.	
    The 10-year German yield sank to 1.72 percent,
down 8 bps on the day and threatening to sustain a break out of
the range that has survived two major tests since November. 	
    The Bund contract could prove volatile at Tuesday's open,
adjusting to any sharp moves in safe-haven bond markets after
the release of U.S. non-farm payrolls data on Friday when
European markets will be closed. European markets will also be
closed on Monday.	
    With a lack of growth at the heart of the euro zone's
problems, confirmation from the U.S. data that the outlook for
the world's largest economy remains upbeat could help allay
fears that a global slowdown will add to European problems. 	
    "Data in the U.S. is far from signalling a slowing down of
the economic cycle. I suspect strong U.S. data could remain
quite supportive for the whole euro area," Manenti said.	
    Looking ahead, in the absence of major economic releases
next week, focus will fall on Italy's sales of medium and
long-term debt to see if it can overcome negative sentiment and
improve on an unconvincing set of BTP auctions last week.	
    However, even if Italy clears that hurdle and Spanish bonds
stabilise in the absence of further budgetary news, the looming
French elections mean the likelihood of a selloff in core German
debt looks remote.	
    France sailed through an auction of bonds worth 8.4 billion
euros on Thursday, but yields rose going into the sale. As the
presidential election approaches analysts expect Paris to face
greater scrutiny over its long-term plans to generate growth and
reduce debt.

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