Two-year euro zone government bond yields hit a 10-week high and the euro fell to a two-week low against the dollar this morning after the EU eased budget rules.
Late last night, Germany won a key concession in the Stability and Growth Pact, which will accord the euro zone's largest economy special treatment for the billions of euros it pumps into the reunified eastern region.
Analysts said the concession to Germany undermined the pact. Debt investors fear that the European Central Bank, which has been an opponent of changing the pact, could respond to a possible loosening of the rules by tightening monetary policy.
The euro came under pressure as the foreign exchange market focused on the long-term structural problems confronting the fiscally weak euro zone.
Shortly after midday, the interest rate sensitive two-year Schatz yield was up 3.2 basis points at 2.563 per cent after earlier hitting 2.578 per cent. The 10-year Bund yield was up 3.2 basis points at 3.73 per cent