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Spain-France borrowing costs surge

MADRID: Spanish and French borrowing costs rose yesterday as political turmoil in Portugal fanned fears the euro zone crisis will reignite, although the higher returns offered drew good demand for both bond sales.

A rift within Portugal's governing coalition following the resignations of two ministers this week has pushed up yields on bonds of more indebted euro zone countries and favoured safe-haven paper.

Portugal's own 10-year yields shot above eight per cent for a time on Wednesday but have since fallen back a bit.

Analysts said cheaper prices after a month in which markets have contemplated both a revival of Europe's crisis and an eventual end to central bank stimulus had helped underpin demand at Spain's four billion euro ($5.2bn) auction and the 7.99bn euro ($10.36bn) French sale.

"While yesterday's dramatic sell-off in Portugal shows peripheral bond markets retain their capacity for brutal price action, the market reaction in Spain and, in particular, Italy has been relatively muted," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.

Spain sold 3bn euros of a new five-year bond and 1bn euros of an existing three-year bond, while France sold 10- and 15-year bonds. Both auctions raised all or nearly all their maximum targeted amounts.

Spain paid between 17 and 20 basis points more than it had to sell similarly-dated debt last month, and the 3.792pc yield on the five-year bond was the highest since February.

France saw its debt costs rise by 26-28 basis points from auctions last month, to 2.32pc for the 10-year OAT, although its secondary market yields have fallen this week as investors sought out highly rated debt.

Spain has now raised almost 67pc of its 2013 bond issuance target. It took advantage early in the year of demand for higher-yielding debt from investors flush with cash pumped in by global central banks.



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