Spread between German-French bonds hits record

2nd November 2011, Comments 0 comments

Eurozone bond markets were under pressure again Wednesday on fears over the Greek debt crisis, with the spread between benchmark German and French 10-year bonds hitting a record since the euro was launched.

Tension on financial markets has soared since Greece announced late Monday that it would hold a referendum on the latest debt rescue agreed by eurozone countries.

The announcement caused consternation and uncertainty, even raising for some the possibility that Greece might leave the eurozone.

It immediately pushed up sovereign borrowing rates for Italy and funds flowed into German bonds in search of safety.

In late morning trading on Wednesday, the Germany-France spread widened to 128 basis points or 1.28 percentage points.

Later, the the German 10-year yield rose to 1.847 percent from 1.770 percent on Tuesday at the close, while the French equivalent yield jumped to 3.114 percent.

The spread between these two instruments is a critical measure of underlying tension in the eurozone since Germany and France are the two main economic and political pillars in the single currency area.

For France, which trails Germany in economic performance, keeping the spread narrow is important in terms of costs in financing its own debt and also in terms of image.

France is determined to retain its AAA rating from credit rating agencies.

Yields on Italian debt continued to rise, reaching 6.227 percent, close to a record of 6.397 percent, despite reported buying of Italian debt by the European Central Bank on Tuesday.

It is widely considered in Italy that a rate of about 7.0 percent renders the financing of the Italian debt mountain unsustainable.

But tension on the Greek debt market eased slightly. The yield on Greek 10-year bonds fell to 22.863 percent from 23.441 percent on Tuesday.

© 2011 AFP

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