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European debt fears ease as bond yields pull back

July 12, 2011 | 11:23 am

Investors hit the pause button on Europe’s debt crisis Tuesday: Yields on Italian and Spanish government bonds fell after surging the previous six sessions.

Traders said the mood was helped by rumors that the European Central Bank was buying bonds in the open market.

Also, Italy was able to sell $9.5 billion of one-year debt in a market auction, though it had to pay a lofty 3.67% yield.

The yield on 10-year Italian bonds rose as high as 6.02% early in the day but fell back to end at 5.57%, down from 5.68% on Monday, which was the highest since 2000.

Eurosign Spanish 10-year bond yields rose to 6.31% early in the session, then rallied to end at 5.85%, down from 6.03% on Monday.

While European authorities still are wrestling with bailouts of Greece, Ireland and Portugal, the “contagion” from the debt crisis spread to the far larger economies of Spain and Italy over the last week.

If Spanish and Italian bond yields keep climbing, the risk is that it will become too expensive for the countries to roll over existing heavy debt burdens at market rates. That's what forced Greece, Ireland and Portugal to seek bailouts from the rest of the European Union over the last 14 months.

Meanwhile, EU leaders still haven’t figured out how to get Greece’s debt mess under control, as the country awaits its second bailout.

The euro currency plunged as low as $1.384 on Tuesday, its weakest level since March, before rebounding. It was trading at $1.401 in New York, down from $1.403 on Monday.

Most European stock markets closed lower for a third straight day but up from their worst levels. The Spanish market fell 0.7%, France lost 0.9% and Germany fell 0.8%. The Italian market gained 1.2% after diving 11% over the previous five sessions.

On Wall Street stocks were modestly higher at midday, with the Dow industrials up 0.5% to 12,564 after falling 1.2% on Monday.

-- Tom Petruno


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Photo: The euro symbol outside the European Central Bank's headquarters in Frankfurt. Credit: Boris Roessler / EPA