Contagion pushes T-bill rates sharply higher

Spain's borrowing costs jumped at Tuesday's Treasury bill tenders on the ongoing fallout from events surrounding the Irish rescue package and the political turmoil sparked by this.

Rates at the three- and six-month tenders were close to double those seen a month ago and at levels last seen two years ago when the European Central bank's key lending rate was 2 percent, compared with 1 percent at present.

The Treasury sold 2.091 billion euros of three-month bills at a cut-off rate of 1.870 percent, up from 0.974 percent at the previous tender for similar paper on October 26. Demand came in at 4.896 billion. The marginal rate at the six-month auction rose to 2.260 percent from 1.298 percent, with the Treasury awarding 1.164 billion out of bids of 3.080 billion. The total amount granted of 3.260 billion was on the low side of the target range of between 3 to 4 billion euros.

Spain's country risk premium Tuesday reached record levels as risk aversion continued to spread from Ireland to other single-currency bloc members perceived to be vulnerable. The yield on the benchmark 10-year government bond climbed to 4.76 percent, with the spread with the German equivalent climbing to 235 basis points.

"Contagion has spread once gain very rapidly, and the effect have been felt on Greek debt, Portuguese debt and also, albeit to a lesser extent, on Spanish, Italian and even Belgian debt," the governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez said Tuesday.