Ten-year Spanish yields climbed for a second day on concern that investors holding the securities may rank behind official creditors in the queue for payment following the bailout.
Italian 10-year bond yields rose to the highest in a week as investors bet the nation is now at the frontline of Europe's debt crisis, raising pressure on Prime Minister Mario Monti's unelected government to avoid succumbing to a market rout.
German bunds pared an earlier decline.
“This bailout doesn't solve the euro-region debt crisis,” said Christian Reicherter, a Frankfurt-based analyst at DZ Bank AG. “There is skepticism about whether the money is enough for the banks and whether the nation might also need help, and this will keep Spanish bonds under pressure.”
Eoin Treacy's view There are was an air of inevitability to the prospects for a Spanish bailout last week and the country's government bond yields contracted steadily until Friday. However, as with just about everything relating to the Eurozone one has to pay particular attention to the detail. This is where the deal agreed at the weekend has proved to be a damp squib from the perspective of investors. The mooted €100 billion will be added directly on to Spain's sovereign debt, no additional oversight from the bailout troika will be imposed but the banks will be bailed out.
While this deal addresses problems in the banking sector, it does not mention the municipal sector which may also need assistance. It will do nothing for Spain's economic growth and is the latest in a series of delaying tactics rather than major policy shift. Greece's general election next Sunday is another point of emotional stress hanging over the market and may act as a catalyst for just how much pressure the Eurozone's financial system can take.
Spanish government bond yields rallied impressively today, holding the three-month progression of higher reaction lows. A sustained move below 6% will be required to question potential for additional upside. Over the long-term, the entire yearlong range above 5% looks like a first step above the almost decade long base. This stresses the need for a strong catalyst in the form of ECB or other buying of Spanish debt to stem potential for an additional rise in the country's risk premium.
The Spanish IBEX Stock Index jumped in early trade but gave up the entire advance to close down on the day. It will need to sustain a move above today's high near 7000 to begin to suggest a return to demand dominance beyond the very short term.