By Jack Duffy

PARIS (MNI) – Bond yields rose sharply across the Eurozone on
Wednesday as a failed German bund auction spurred fears that investors
were abandoning even the core of the single-currency block.

Yields on Belgian 10-year bonds soared by 43 basis points to 5.51%,
the highest since November 2000, while Italy’s 10-year rates climbed
back toward the 7% level, rising 16 basis points to 6.98%.

“There is absolutely no confidence in sovereign debt at the moment,
which means there is no confidence in anything,” said Gary Jenkins, head
of fixed-income research at Evolution Securities in London.

German yields rose after the government managed to sell only E3.6
billion of an expected E6 billion of new 10-year bunds. Worries that the
capital flight from Europe was now beginning to affect Germany pushed
yields on existing 10-year bunds 18 basis points higher to 2.09%.

A spokesman for the German debt agency said a nervous market
contributed to the weak investor response and that the remaining bonds
would be sold on the secondary market. He noted that the coupon of 2.0%
was a record low for this segment.

Although the European Central Bank reportedly intervened again on
Wednesday to buy Italian and Spanish bonds, the move had little effect,
as investors focused on an increasing number of negative factors.

Among them were news reports that the bailout of Franco-Belgian
bank Dexia was near to collapse and that the added risk could be another
negative for France’s ‘AAA’ credit rating.

The rating agency Fitch said Wednesday that France’s rating could
be at risk if the debt crisis caused a deeper economic slump or an
increase in France’s continent liabilities. Fitch’s statement came after
a similar warning by Moody’s on Monday. French 10-year yields rose 17
basis points to 3.70%.

Standard & Poor’s head of sovereign ratings, David Beers, said
heightened risk of a European recession could put pressure on ratings of
other Eurozone countries.

“The financial dynamics unleashed by the ongoing confidence crisis,
in Standard & Poor’s view, have heightened the risk of renewed recession
in a growing number of Eurozone members that potentially could put
additional downward pressure on [the] euro area’s sovereign ratings,”
Beers told a conference in Dublin.

Traders said there were few positives to weigh against the negative
news, as German Chancellor Angela Merkel continued rule out any
near-term introduction of eurobonds or a wider fire-fighting role for
the ECB — solutions that many investors believe could have the greatest
impact.

“It is my conviction that we should change absolutely nothing on
the mandate of the ECB,” Merkel said in a speech in the lower house of
parliament.

The poor reception of the German bund offering also darkens the
prospects for a number of other Eurozone states preparing to tap the
debt markets in the week ahead. Belgium plans to sell maturities of up
to 30 years on Monday. Italy, France and Spain also have auctions
scheduled during the week.

–Paris Newsroom; +331-4271-5540; jduffy@marketnews.com

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