05 September 2011

FT: Fears rise again over Europe debt crisis

German benchmark borrowing costs fell below 2 per cent to all-time lows while Italy’s shot up as worries about the eurozone debt crisis and the fragility of banks once more intensified.

German 10-year Bund yields fell 16 basis points to 1.85 per cent, their lowest ever. The move below 2 per cent tracked that of US Treasuries, which closed below that level for the first time since 1950.

Italy, which has the world’s third-largest bond market, saw the sharpest rise in its benchmark costs in almost two months, with 10-year yields leaping 27bp to 5.56 per cent. Investors have been unnerved by the political disputes over a new austerity package in Rome. The jump in yields on Italian debt came despite aggressive intervention from the European Central Bank last week, which bought €13.3 billion in eurozone government bonds, twice as much as the previous week. Spain’s 10-year yields increased 14bp to 5.26 per cent on Monday.

The fall in German Bund yields meanwhile will heighten fears that some western markets could be sucked into a Japanese-style scenario of extremely weak economic growth and poor returns for shares. Once Japanese yields dropped below 2 per cent in 1997, they only rose above it again for a few weeks.

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