Spanish, Italian bond yields ease

Spanish and Italian debt eased back from a sharp sell-off today and shares staged a modest recovery but investors are wary of signs that the euro zone's debt problems are getting worse or that global growth is flagging.

Yields on Spain's benchmark 10-year bonds fell 11 basis points to around 5.88 per cent after rising to nearly six per cent yesterday on new concerns about the government's ability to cut its deficit.

Italian bond yields fell 14 basis points to 5.56 per cent, although yields at a 12-month Treasury bill auction jumped, reflecting doubts about the euro zone and nervousness ahead of a bigger sale tomorrow.

"We are having a kind of mini perfect storm with the conjunction of euro zone crisis flaring up, Chinese inflation and the US labour market data," said William De Vijlder, chief investment officer of BNP Paribas Investment Partners.

Despite the concerns, safe-haven Germany saw soft demand when it offered the lowest ever yield for its 10-year bonds at an auction today.

German government bond futures extended their losses after the auction. The main Bund futures contract sank to a day's low of 139.59, a fall of 73 ticks, from around 139.80 before the auction results.

After a strong first quarter for global asset markets thanks largely to massive liquidity injections by the world's major central banks and some positive economic numbers, investors have begun the second quarter more nervous about the outlook.

Recent data showed the US jobs market was surprisingly weak in March while China's annual inflation rate jumped more than expected to 3.6 per cent.

In the share markets today, global stocks as measured by the MSCI world equity index were little changed but Asian markets weakened after a sharp fall in key US stock indexes yesterday.

US stocks could recover later after aluminium producer Alcoa surprised Wall Street with a first-quarter profit after a loss in the fourth quarter of 2011 as demand from the aerospace and automobile sectors improved.

The FTSE Eurofirst index of top European shares, which dropped to levels last seen in mid-January yesterday, recovered to be up nearly 0.5 per cent at 1030.90.

The euro has been resilient to the selloff in the sovereign debt of peripheral countries and edged up 0.25 per cent to $1.3110, while the yen benefited from safe-haven demand, rising to a 6-week high against the dollar.

However, the euro was seen vulnerable to further bouts of selling, especially if Spanish and other euro zone government bond yields were to start rising again.

In commodity markets oil fell below $120 a barrel to its lowest level in almost two months, pressured by rising US inventories and concern about the strength of global demand.

North Sea Brent was down 30 cents at $119.58 a barrel, after falling as low as $119.05, its lowest since February 17th.

Gold also edged lower, pausing after four consecutive sessions of gains, driven by safe-haven flows on the cloudier global economic outlook, but investors have turned cautious, awaiting further clues on growth.

Spot gold inched down 0.2 per cent to $1,656.96 an ounce, after hitting a one-week high of $1,662.60 yesterday. US gold lost 0.1 per cent to $1,658.50.

Reuters