The cost of borrowing for some of the eurozone’s biggest countries eased today after a torrid week that saw record highs raise fears of defaults.
Traders speculated the European Central Bank (ECB) was stepping in to buy bonds and drive the costs down.
Yields on Spanish 10 year notes fell to 6.41 per cent, a day after a €30bn (£25.74bn) auction at 6.97 per cent.
Earlier today the yield had hit 7.09 per cent, passing the seven per cent level that saw Greece, Portugal and Ireland seek bailouts.
Italian yields also dropped, falling to 6.71 per cent from 6.79 while the difference between the interest charged on French and German bonds narrowed to 1.63 per cent from over two per cent on Thursday.
Peter O’Flanagan, trader at Clear Currency, said the seven per cent figure on Spanish bonds may have triggered ECB buying.
“There’s a lot of pressure on the ECB to backstop European nations,” he said.
But he added that it without signs of a resolution being reached there was unlikely to be any sustained reduction of the yields.
Spain and Italy will both hold bond auctions next week, along with fellow Eurozone countries Holland and Germany.
There is unlikely to be much appetite for those issues as a resolution doesn’t seem near, O’Flanagan said.
The relative calm in the markets came after Mario Draghi fired a broadside at Eurozone leaders.
The new president of the ECB criticised the failure to implement the European Financial Stability Facility.
“Where is the implementation of these long-standing decisions?” he said at a banking conference in Frankfurt. “We should not be waiting any longer.”
Despite the relatively good day, the prospects for sovereign debt remain bleak.
Louise Cooper, Markets analyst at BGC Partners, pointed out that in 2006 the entire debt issued from all 17 Eurozone countries was €5.8trillion, but just four years later that had risen almost 40 per cent to €7.8trillion.
“There is just so much Euro debt out there, there are no more willing buyers,” she said.
“Many banks and investment funds already own an awful lot of Euro sovereign debt, they are up to their armpits in this stuff already, why buy more? Especially when the future looks so bleak.”
But O’Flanagan sees the real issue being the perceived risk of the bonds rather than over-supply.
Josef Ackermann, chief executive of Deutsche Bank, added to the gloom with comments suggesting no end to the crisis is in sight.
"We need to prepare for a prolonged period of volatility and uncertainty,” he said to a gathering of central bankers and regulators at a Frankfurt conference.
"It is time to acknowledge this is the new normality. It will take years for the system to adjust for a new reality.”