Bond yields surge as old fears come flooding back

Spanish and Italian bond yields shot up yesterday as market fears over the future of the eurozone came flooding back, swamping early relief over the weekend's election result in Greece.

Ten-year bond yields on debt issued by Madrid surged to their highest levels in the history of the single currency touching 7.28 per cent, before falling back to 7.16 per cent. Rome's 10-year bond yields also jumped above 6 per cent, ending at 6.09 per cent. Yields above 7 per cent are widely believed to be unsustainable.

The yield spike prompted the Spanish Treasury Minister, Cristobal Montoro, to call for capital market intervention from the European Central Bank. "The ECB must respond firmly, with reliability, to these market pressures that are still trying to derail the joint euro project," he said. Investors had drawn a sigh of relief at the Greek result, but stressed that the underlying crisis had still not been solved. "While Greek euro exit fears have eased, this outcome does little to alleviate the weak fundamentals that currently weigh on Spain and Italy," said Michala Marcussen of Socit G*rale.

Others said European policy makers were still doing too little. "There is also no sign yet of the collective political will to take the tough decisions required to implement a long-term strategy to resolve the crisis," said Mike Turner, Head of Global Strategy & Asset Allocation at Aberdeen Asset Management.

European leaders sent out conflicting signals over how they might respond to the latest downward lurch in the eurozone crisis.

Ireland's state broadcaster reported that the European Union and the International Monetary Fund are considering doubling the repayment term of Dublin's €85bn (£68bn) bailout, from 15 years to 30 years

Yet a suggestion from the German foreign minister, Guido Westerwelle, that Europe is preparing to relax the conditions of Greece's bailout in response to the election result, was swiftly denied.

Mr Westerwelle had told German radio that Greece's political standstill over the past month had inevitably thrown Athens' deficit reduction plans off schedule.

Commodities markets fell in response to fears the unresolved eurozone crisis will undermine global demand for energy. Brent crude futures fell by $2, having bounced overnight.