Bond yields jump in France, Belgium, Austria as crisis spreads

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More dominoes may be about to fall in Europe.

A new selling wave swamped government bond markets on the continent Tuesday, driving yields sharply higher in France, Belgium, Austria and Spain, among others.

Despite its AAA-credit rating, France’s 10-year bond yield soared to 3.68%, up from 3.42% on Monday and the highest since April. The yield has surged from 2.50% in early September.

Belgian 10-year bond yields rose to 4.91%, from 4.59% on Monday.

The jump in interest rates signals a further spreading of the debt-crisis contagion from Italy to other countries, as investors grow increasingly fearful about governments’ abilities to pay their debts.

“The respite from Eurozone issues was ephemeral at best as changes in leadership in Italy and Greece [last week] were not enough to convince markets that the debt issues were any closer to resolution,” George Goncalves, interest rate strategist at Nomura Securities, wrote in a note to clients.

Making matters worse, a new European recession seems increasingly likely, which will only make it more difficult for governments to dig out of their debt holes.

Rocketing yields on Italian bonds over the last two months opened a new and more dangerous chapter in the debt crisis. Italy’s woes led to the departure of Prime Minister Silvio Berlusconi over the weekend.

On Monday, Italy paid a yield of 6.29% to issue $4 billion in new five-year bonds. The rate was the highest in 14 years. By contrast, the U.S. Treasury pays just 0.90% on five-year debt.

Financial markets have been looking to the European Central Bank to halt the contagion. In theory, the ECB could commit to buying unlimited quantities of bonds to try to hold down rates. But the ECB has seemed reluctant to act aggressively.

“In the prophetic words of Sting, the market is sending out an SOS to ECB policymakers,” Goncalves said. “However, a good response from the ECB does not seem forthcoming.”

European stock markets ended mostly lower for a second straight session. The Italian market fell 1.1%. French shares slid 1.9%. But stocks remain above their September lows.

The euro currency slipped 0.6% to a one-week low of $1.355.

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-- Tom Petruno