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Europe's debt fears revive as Irish bond yields jump

August 25, 2010 | 11:06 am

Not every government bond is a hot investment.

In an echo of Europe’s spring debt crisis, yields on Irish, Greek and Portuguese government debt surged Wednesday as some investors bailed out.

The yield on 10-year Irish government bonds jumped to 5.58%, up from 5.36% on Tuesday and the highest since the yield briefly spiked to 5.86% on May 7 -- at the height of fears of a sovereign-debt meltdown in Europe.

A key catalyst for the latest sell-off: Standard & Poor’s on Tuesday cut Ireland’s credit rating one notch, to AA-minus from AA, citing the rising budget cost of the government’s program to support the country’s beleaguered banks.

S&P also warned that “a further downgrade is possible if the fiscal cost of supporting the banking sector rises further.”

The downgrade wasn’t a big surprise, given that S&P’s rival Moody’s Investors Service had already trimmed its own rating of Ireland last month. But with the mood darkening in financial markets worldwide on fears that the global economic recovery is fading, S&P’s decision was a good excuse to sell the bonds of Europe’s weakest economies.

The yield on Greece’s 10-year bond jumped to 11.43% from 11.03% on Tuesday, also reaching the highest since the peak spring yield of 12.45% on May 7.

Portugal’s 10-year bond yield rose to a four-week high of 5.36% from 5.25% on Tuesday. The yield rose as high as 6.28% on May 7.

By contrast, investors have continued to rush into government debt that they perceive to super safe. U.S.  Treasury 10-year notes pay just 2.50%; German 10-year notes pay even less, at 2.15%.

Despite markets’ rattled nerves Wednesday, Portugal was able to sell $1.65 billion of new six- and 10-year debt, though it had to pay up to entice investors.

And the latest jump in yields isn’t hammering the euro currency, which has edged up to $1.266 from $1.263 on Tuesday.

Investors may be less worried about the risk of European bond markets coming unglued because of the huge financial-support program that the European Union put in place in May. That program includes ongoing purchases of government bonds by the European Central Bank for its own account.

Still, with each tick higher in interest rates, Ireland, Greece and Portugal will find it more expensive to dig out of their fiscal holes.

Win Thin, a currency strategist at Brown Bros. Harriman in New York, says that credit-rating cuts for Europe’s weakest economies “are likely to persist well into 2011, especially as recession hits many of those peripheral countries.”

A new report from Morgan Stanley warns that the sovereign-debt crisis is global and "is not over."

-- Tom Petruno

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