Market pessimism on the euro zone

12 Jun 2012 by Jim Fickett.

It was clear the Spanish bank rescue was failing to address wider problems, and no surprise that Spanish bond yields rose to a record today. But there is worse news – pessimism on the entire euro zone is apparently rising, as German yields have risen as well. From the Financial Times:

Borrowing costs for Germany, the UK and France, deemed among the safest sovereigns in Europe, rose sharply on Tuesday as investors took fright at the worsening crisis in Spain.

Yields on Spain’s government bonds soared to their highest level since the launch of the euro. The yield on benchmark 10-year debt increased to more than 6.8 per cent.

However, it was the climb in borrowing costs of the “core” sovereigns, which typically tended to move in the opposite direction of the periphery’s bond yields, that unnerved many investors.

Germany, the UK and France’s 10-year bond yields have risen 25 basis points, 16bp and 47bp to 1.42 per cent, 1.69 per cent and 2.73 per cent respectively since the start of the month.

Analysts said this was a worrying development, which indicated investors could be starting to prepare for two “tail-risks” – a break-up of the common currency bloc or moves towards fiscal union.