Bond yields rise on debt concerns

The euro dropped to the lowest level in four months versus the yen and the dollar, and bond yields among the peripheral European countries rose on growing concerns that the euro zone's sovereign debt crisis was spreading.

Irish bond yields hit a new euro-era high yesterday while stock markets sold off around the world as Italian contagion fears escalated.

The yen reached its strongest level against the dollar since the Group of Seven nations jointly intervened to weaken the currency following the March 11th earthquake as stocks slumped, spurring demand for haven assets.

Finance ministers "didn't present a solution," said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. "It looks like they still believe that Greece will be able to pay back its debt. This optimism isn't shared by the market. I would expect euro-dollar to remain under pressure this week."

The euro fell as much as 2.7 per cent to 109.58 yen, the least since March 17th, before trading at 111.07 as of 6.33am in New York. It touched $1.3837, the weakest since March 11th, before trading 0.6 percent lower at $1.3944.

The 17-state currency was 1 per cent lower at 1.16117 Swiss francs after dropping to a record 1.15533. The dollar sank to 79.17 yen, the lowest level since March 18th.

The euro has fallen against all but one of its 16 major peers tracked by Bloomberg this month as the most recent flare- up in the debt crisis sapped confidence in the currency, even as the European Central Bank increased its benchmark interest rate.

"The market has become particularly concerned due to the sell-off in Italian bonds. A steep widening of the spread between Italian and German bonds is making the market worried," said Osamu Takashima, chief forex strategist at Citibank in Tokyo.

"The market was to a certain extent expecting the problems in Greece to spread to Spain, but this drastic move in Italian bonds was very surprising."

European stocks hit a four-month low today as investors were nervous over the ongoing debt crisis.

The spread on the 10-year Italian bond yield over that of German bonds widened to above 300 basis points the previous day from about 180 bps at the start of the month.

The yield on the 10-year Irish bond continued to climb, rising to 13.397 per cent this afternoon. The yield on three-year debt was also up, reaching 17.659 per cent, a 0.418 per cent rise.

European Union finance ministers meet later today and are under pressure to soothe market nerves ahead of Thursday's Italian bond auctions. Italy is aiming to raise €7.75 billion in the debt market, according to estimates from Barclays Capital.

Reuters, Bloomberg