Spanish and Italian bond yields jumped sharply on Monday as investors warned that the eurozone crisis will worsen unless policy makers come up with clear plans to tackle the region’s debt problems at this week’s EU summit.
Spanish and Italian yields, which have an inverse relationship with prices, rose 25 basis points to 6.63 per cent and 21bp to 6.01 per cent, respectively – closer to levels that some investors consider unsustainable – ahead of the summit on Thursday and Friday.
The worries over a deepening of the eurozone crisis sparked flows into the haven of German Bunds with yields on 10-year debt dropping 12 basis points to 1.46 per cent.
A German auction raised just over €2bn in 12-month bills, which priced at yields of 0.0191 per cent – the lowest of the year for this maturity.
Richard McGuire, senior fixed-income strategist at Rabobank, said: “We have been travelling on hope over the past few days in the eurozone bond markets. I think the hope has started to fade today over what the policy makers will come up with.”
A further worrying sign was the flattening of some peripheral government bond yield curves, with shorter-dated debt underperforming longer-dated debt. This is a sign that investors think the crisis will worsen before there is an improvement.
Spanish five-year bond yields, for example, increased 37bp to 6.05 per cent, while Italian five-year yields also jumped 37bp to 5.58 per cent.
However, some market participants were more optimistic, saying that policy makers would be forced to take decisive action because of the “dire consequences” otherwise.
The head of one of Europe’s biggest private banks said: “We have decided to increase our exposure to peripheral debt, albeit in a small amount, because we think the eurozone has no choice but to come up with something to arrest the crisis. The consequences would be dire, if they failed. Policy makers know this.”
The sombre mood in the markets was not helped by comments by George Soros, the billionaire investor, who said on Bloomberg television on Sunday that a failure by European leaders meeting this week to tackle the financial crisis could spell the demise of the euro.
Elsewhere, Belgium and France staged relatively successful bond auctions despite growing pessimism in the markets.
Belgium sold €2.81bn of bonds with maturities ranging from five years to 20 years, meeting its maximum target for the auction.
There was strong demand for France’s short-term debt, with one-year yields dipping closer to zero.
France has seen its borrowing costs drop in recent weeks to historic lows as some investors consider Paris’ debt relatively safe, with the attraction of better returns than those offered on German bonds.
Debt management agency Agence France Trésor said it sold €8.385bn of short-term bills, ranging from maturities of three months to one year, at the top end of its target range of €7.1bn to €8.4bn.