Spanish, Italian 10-year bonds extend gains

9th August 2011, Comments 0 comments

The pressure on Spanish and Italian 10-year government bonds continued to ease Tuesday after the European Central Bank intervened in the market as part of efforts to tame the eurozone debt crisis.

In early trade, the yield or rate of return earned by investors in the benchmark Spanish 10-year bond was 4.983 percent, down sharply from 5.138 percent at the close Monday, with the Italian bond on 5.137 percent after 5.277 percent.

The ECB said Monday it would "actively" resume eurozone bond purchases after Italy and Spain announced fresh measures to bolster their economies and tackle debt problems which had pushed their borrowing costs to record highs.

While ECB intervention helped bonds Monday, the stock markets sold off wildly on fears the eurozone debt crisis remains a very real threat, and especially to Italy and Spain, the third- and fourth-largest eurozone economies.

"We think the (ECB) purchases are going to continue today," Credit Agricole CIB analysts said in a note.

BNP analysts said the bond markets will be driven by what happens to stocks -- bonds have tended to rise as share prices have slumped -- and what further action the ECB will take.

With rates back down around five percent, both Italy and Spain are now on much safer ground after their borrowing costs topped six percent in recent weeks, a level unsustainable over the longer term for public finances.

In contrast to gains for Spain and Italy, bonds issued by Europe's powerhouse economy Germany slipped as investors worry that Berlin will have to take on even more of the burden of resolving the eurozone debt crisis.

The yield on the benchmark German 10-year bond rose to 2.320 percent from Monday's close of 2.260 percent.

As bond prices rise, reflecting increased demand, the return or yield earned by investors falls and conversely if prices fall, the yield rises, reflecting investor reluctance to hold the instrument.

Bond yields are seen as a key indicator of risk appetite, with lower rates prevailing when investors are most confident.

© 2011 AFP

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