The debt risk premium for Spain and Italy showed a record wide gap since the creation of the euro on Friday on concerns that the two countries could be dragged down by the eurozone debt crisis.
The pressure eased in late morning trading, however, on speculation that the European Central Bank was in the market buying bonds in an effort to hold back the tide and gain time for the eurozone.
The spread or difference in the rate of return on Spanish 10-year government bonds and the benchmark German bond, the strongest in the eurozone, was 417 basis points (4.17 percentage points) and 416 basis points for Italian debt in early deals.
At 11:40 SA time, the spread had narrowed sharply to 376 basis points for Spain and 385 basis points for Italy.
The yield on the Spanish 10-year bond still remained above the danger level of six percent but was down at 6.053 percent, off early highs of 6.310 percent and compared with 6.271 percent at the close Thursday.
In contrast, the German 10-year bond was at just 2.316 percent, reflecting how fearful investors have become, seeking to put their money into the safest assets available as the markets are roiled by debt and growth concerns.
The French 10-year bond was meanwhile at 3.210 percent, up from 3.123 percent, with its spread to the German paper at a record 89.5 basis points.
This is a closely watched indicator of divergence, or converegence, between the two powerhouse economies in the eurozone.
At ING debt strategy and research, Alessandro Giansanti said:
“The yield spread between Germany and France starts to become a concern and we can attribute the main part of the level to a perceived different credit risk for the two countries.”
But he also said that comments from the European Central Bank on Thursday “on the fragility of economic growth” had “triggered an impressive rally on the German (yield) curve.”
Dealers said that the European Central Bank's decision on Thursday to return to the government bond markets as a buyer had not convinced investors sceptical that Europe can resolve its critical debt problems.
“The movements seem extreme but more (ECB) intervention will be needed to restore confidence,” analysts at BNP Paribas said.
However, in Madrid, there were reports that the central bank for the 17 nations that use the euro currency had asked for prices on Spanish and Italian debt, a signal that it could be about to buy.
At Credit Agricole CIB, analysts said that “for the (ECB's) intervention to be effective, the market would have to believe that it is potentially unlimited and that it can happen at any moment.”
Such a buyer of last resort would act as a backstop, stabilising markets but would require untold billions of euros (dollars) to be credible.
On Thursday, the head of the EU commission called on member governments to review the bloc's debt rescue mechanisms urgently so as to stop the contagion which was spreading from peripheral eurozone countries.
When investors sell a government bond because they do not want to carry increased risk, the price of the bond falls, pushing up the fixed interest on the bond as a percentage of the new lower prices. In the case of German bonds, this effect is working in the opposite direction. - Sapa-AFP