Spanish, Italian debt risk premiums hit record

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 0730 GMT, the spread had eased back slightly to 408 basis points for Spain and 407 basis points for Italy.

The yield on the Spainish 10-year bond however remained well above the danger level of six percent, at 6.310 percent, up from 6.271 percent at the close Thursday.

The Italian 10-year yield rose to 6.227 percent from 6.189 percent.

In marked contrast, the German 10-year bond was at just 2.229 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 3.189 percent, up from 3.123 percent, with its spread to the German paper at a record 89 basis points.

Dealers said the European Central Bank\'s decision 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.

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.

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