Irish 10-year bond yields moved above 10 per cent this afternoon, and two-year notes fell on concern a permanent solution to the fiscal crisis will elude European Union leaders meeting at a summit starting tomorrow.
The bonds of the euro zone's most-indebted nations edged lower too.
The declines drove the yield on two-year notes to more than 10 per cent for the second consecutive day, while the extra yield investors demand to hold the nation's 10-year bonds instead of German bunds climbed to a record. By 2.20pm, they had reduced from a high of 10.185 per cent to 10.057 per cent. The yield on two-year notes was 10.511 per cent, down from a high of 10.704 per cent.
Portuguese bonds slid as prime minister Jose Socrates faces a vote today against his deficit-cutting plan that may spur early elections and the need for an EU bailout.
"It's death by a thousand cuts," said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. "We're waiting for Portugal. There isn't actually a solution to the problem. Yields remain at unsustainable levels, technically forcing insolvency."
The yield on the Portuguese 10-year bond climbed 10 basis points to 7.59 per cent, with the similar-maturity Greek yield up four basis points to 12.56 per cent.
Portugal's lawmakers will discuss the government's program of austerity measures at 3pm in Lisbon. The opposition Social Democratic and Communist parties both pledged yesterday to table resolutions against the plan.
"The likelihood that the Portuguese government will fall this week looks high," Nicola Mai, a London-based economist at JPMorgan Chase and Co, said in a note yesterday. "This suggests that the sovereign will likely access" the EU's rescue fund "in the near term, despite the current government's efforts to avoid this outcome."
The yield on the bund fell three basis points to 3.23 per cent, with the price rising €2.30 per €1,000 face amount. The two-year note yield dropped two basis points to 1.68 per cent.
Germany sold an additional €3.4 billion of the 10-year bund, the euro-region's benchmark government security, at an average yield of 3.24 per cent. Investors bid for 2.2 times the amount of bonds on offer, up from a so-called bid-to-cover of 1.9 at the previous auction of the securities on February 16th.
Investor demand for the bonds was "very strong," Chiara Cremonesi, a strategist at Unicredit Bank AG in London, said in an e-mailed note. "Risk aversion, mainly driven by peripheral jitters, the fact that this will be the last reopening of this benchmark, may have been supportive factors for demand."
German bonds had declined this week as European Central Bank policy makers including president Jean-Claude Trichet reiterated that they may raise interest rates as soon as next month to contain an inflation rate that has quickened past their 2 per cent target, even as the region grabbles with a debt crisis that forced Greece and Ireland to seek outside aid.
German government bonds have handed investors a loss of 1.8 per cent this year, with US Treasuries returning 0.5 per cent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek bonds returned 1.4 per cent even as they lost 1.1 per cent this month. Irish securities have lost 4.2 per cent this year, while Portuguese debt dropped 4.1 per cent, the EFFAS indexes show.
Additional reporting: Bloomberg
