Italian, Spanish yields rise as ratings threat looms

Italian bond yields rose on Tuesday as the risk of sovereign rating downgrades across the eurozone kept markets on edge after steps towards fiscal integration failed to ease the debt crisis in the short term.

Longer-dated Spanish bonds also rose as riskier assets suffered due to the risk that rating agency Standard and Poor's could act on its warning over the region's debt ratings.
Measures to strengthen budget discipline agreed at a European Union summit last week were not seen as sufficient to ease immediate market worries over sovereign debt -- something only a huge financial backstop provided by the European Central Bank was seen likely to achieve.
"Clearly investors have reassessed the EU agreement and the response of the sovereign ratings is at the forefront of investors' minds," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.
"Against that backdrop investors continue to shift away from the likes of Italy and Spain."
Both country's debt was likely to remain under pressure in the near term with bond sales later this week adding to pressure. However a reluctance to trade into the year-end and persistent ECB bond-buying intervention could delay any major sell-off, one trader said.
Italy's 10-year yield rose 10.5 bps to 6.70 percent, but traders reported ECB buying in maturities up to 10 years which help yields off their highest levels. The Spanish equivalent was 2 bps higher at 5.83 percent and the cost of insuring against a default rose for both countries.
Bund futures slipped 22 ticks to 136.60 but clung onto the majority of large gains made on Monday. Trading volumes were very light, with less than 200,000 futures contracts traded by midday -- under half the usual number.
Technical charts showed a break above Friday's high of 137.12 would open the door for fresh rises, possibly testing the 139.58 high set in mid-November, said Futurestechs analyst Clive Lambert. Bailout Bills
The European Financial Stability Facility (EFSF) bailout fund sold 1.97 billion euros of three-month bills at a yield of 0.22 percent in a solid start to its new short-term debt issuance programme.
"This is a successful debut," said UniCredit analyst Kornelius Purps. "Demand was healthy. The reason for this is a considerably higher yield measured against comparable German bonds."
Concerns about the future structure of the rescue fund had caused the previous EFSF bond issue to struggle, but the short-term paper was not seen suffering from the same problems.
Spain, Greece and Belgium also successfully issued short-term debt.
Analysts said further ratings downgrades were being priced into the market after Standard and Poor's warned last week that the ratings of 15 euro zone countries could be cut if leaders failed to strike a deal on how to solve the debt crisis.
Nevertheless, the impact of any cuts would vary across the region, with France seen likely to suffer if it loses its triple-A status -- a move that would also threaten the rating of the region's bailout fund.
"A lot is priced in... maybe for France we could see further widening but the biggest effect will be for supranationals like the EFSF. If (the EFSF) loses its triple-A rating it could have some trouble to find investors," said Alessandro Giansanti, strategist at ING in Amsterdam.
The impact on German debt, however, may only be muted with investor demand for low-risk assets likely to remain strong, Giansanti said, drawing comparison with the limited effect of a rating downgrade for U.S. Treasuries.
A survey of German analysts and investors showed an unexpected rise in investor sentiment, ending a run of worsening data, but highlighting that the market outlook remains gloomy. The ZEW index rose to -53.8 in December, up from November's reading of -55.2 and confounding forecasts for a lower print.