* Spanish 10-year yields break above 7 percent
* Two-year Bund yields turn negative after ECB rate cut
* Bund futures have their best week since December 2011
By Ana Nicolaci da Costa
LONDON, July 6 Yields on Spain's 10-year debt
rose back above the 7 percent danger level on Friday as the
impact from a European Union summit last week faded and an
interest rate cut in the euro zone did little to restore
investor appetite for riskier assets.
The European Central Bank's rate cut to 0.75 percent put
pressure on two-year German bond yields, taking them to negative
territory for the first time on record. That prompted investors
to seek returns up the German yield curve and in other
relatively safe euro zone debt markets, like France.
"The ECB said nothing to help the periphery. The ECB rate
cut is not going to help periphery with yields at (current
levels)," one trader said.
"The summit seems to be getting picked apart and markets are
reacting accordingly. In a slowing growth environment, there is
no way these countries are going to be able to meet any formal
target anyway. The economy is not doing them any favors
Ten-year Spanish government bond yields rose
19 basis points to 6.97 percent, having broken above the 7
percent level earlier in the day.
When yields on Irish, Portuguese and Greek debt surpassed 7
percent, they quickly spiked, making borrowing costs prohibitive
and forcing those countries to seek international help.
Spanish yields were back to levels hit on July 28th, one day
before European leaders decided that euro zone rescue funds
could be used to buy peripheral debt in secondary markets and
support banks directly.
But investors still doubt the fund has enough capacity to
perform those tasks efficiently, while Finland has opposed its
use for bond purchases.
Some had hoped the ESM bailout fund would eventually be
allowed to borrow money directly from the central bank, but ECB
President Mario Draghi dismissed that idea in a news conference
following Thursday's rate decision.
"There was a perception in the market that the ECB would
provide at least a hint ... that the ECB was ready to support at
least in some form (peripheral bond markets)," UBS rate
strategist Gianluca Ziglio said.
"The EU has lost a very, very big opportunity and it seems
it is being punished by the market ... Things are going to get
worse for the periphery."
GLOOMY U.S. PICTURE
U.S. data did little to cheer gloomy financial markets,
showing that U.S. employers added fewer jobs in June than
markets had expected.
The report fueled concerns that Europe's debt crisis is
shifting the U.S. economy into low gear, raising the pressure on
the Federal Reserve to do more to boost growth.
German Bunds saw their biggest weekly rise since
December 2011, rising 2.1 percent, after three consecutive weeks
Bund futures jumped 82 ticks to a settlement close of 143.94
pushing 10-year yields 6 bps lower to 1.33
Two-year German yields were down 3.1 bps at
-0.009 percent, prompting investors to seek higher returns up
the German yield curve, with thirty-year bonds outperforming.
Five-year yields fell 6.1 bps to 0.34 percent
and thirty-year yields dropped 7.7 bps to 2.18 percent.
Investors also sought value in other relatively safe
markets, with debt from France, Belgium, the Netherlands and
Austria all benefiting.
"German yields are so low now, accounts are looking for
yields. France is the most liquid and the biggest market so
that's why Asian (real money) accounts are buying," a second
trader said. "This morning we saw Asian accounts buying
five-year France and 10-year France in large size."
French five-year government bond yields fell
16.5 bps to 1.04 percent, while 10-year yields eased 12 bps to
Five- and 10- year Belgian, Dutch and Austrian yields were
all down sharply.