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Tuesday, June 8, 2010

Politics, growth fuel market jitters over Spain

sharp rise in Spanish bond yields this month suggests that after a few weeks of relative calm, financial markets again see Spain as a major danger spot in Europe's debt crisis.

In mid-May, yields fell back sharply after the European Union agreed on a trillion-dollar financial safety net for euro zone states, and after Spain announced fresh austerity measures designed to curb its public debt over the next several years.

But the confidence created by those steps is now evaporating because of political instability in Madrid and a poor outlook for economic growth.

The yield on Spain's 10-year government bonds climbed 10 basis points on Monday to 4.66 percent, bringing its rise over the past week to 36 bps -- and leaving the yield well above the peak of 4.50 percent hit before the EU's intervention.

The rise has occurred despite an unprecedented programme of government bond purchases launched by the European Central Bank in May. Traders believe the ECB has focused mainly on buying Greek bonds, but that it has also purchased some Spanish debt.

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