Bond yields are climbing in Spain and Italy once more – and this time, yields are rising in Germany as well, as fears grow that the eurozone crisis is becoming more difficult to contain.

The financial markets appear to be becoming increasingly frustrated at the slow pace at which Europe’s policymakers are working to try to address and resolve the continent’s sovereign debt crisis.

That might explain why bond yields continued to rise throughout the region, with even Germany joining the list of countries that will have to pay higher borrowing costs in future, thanks to the decision by Moody’s Investor Service to cut its outlook on the German bund. That call was made in light of the assessment by the agency’s analysts that whether the single currency holds together or collapses, Germany will pay a hefty price. The only question is whether that will come in the shape of soaring debt as it shoulders the cost of a bailout, or in the form of massive debt at German banks.

Meanwhile, the bond market is clearly signaling that it suspects that a bailout of Spain’s banking sector – already announced, weeks ago – will not be adequate to address that country’s economic woes. A Spanish auction of short-term T-bills went off smoothly this morning, but that is only a drop in the bucket of what Spain will need to raise from global bond investors between now and the end of the year. Moreover, many of those sales will be at the higher end of the yield curve – and at vastly larger yields. In trading yesterday, the Spanish 10-year bond hit a new record of 7.6%, ending its trading session slightly below that at 7.462%.

Italian bond yields also are soaring, with both Spain and Italy seeing yields approach – or cross – the 7% threshold at which point the debt loads of Ireland, Portugal and Greece became impossible for those governments to finance and where bailouts became inevitable. In Italy yesterday, the shorter-dated bond maturities saw their yields rise more than those further out on the yield curve, producing a flatter yield curve, as investors reacted to what they perceive as a greater degree of risk at the shorter end of that curve.

Yesterday’s market activity is yet another example of the waves of anxiety that likely will continue to batter European markets. Are we on the verge of what is becoming known as a “Spanic” – a panic surrounding a possible Spanish economic collapse? It’s too early to tell, but with big bond repayments due in October, and the Spanish banking system still wobbly, policymakers have a small window in which to develop contingency plans.

 
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