Pressure on peripheral eurozone debt markets intensified as the closure of US markets for the Thanksgiving Day holiday made for a thinly traded session elsewhere.
Analysts said the already nervous mood among eurozone investors had not been helped by comments from various European policymakers.
?In particular, Angela Merkel and Axel Weber were again stressing the importance of enshrining private sector involvement in the permanent bail-out mechanism currently being negotiated to replace the current ad hoc system based around the European Financial Stability Facility,? noted Daiwa Capital.
?While any such private sector participation mechanism is at least three years away, given the febrile atmosphere in markets at present, all such comments are serving to diminish investor appetite for peripheral government bonds.?
Political uncertainty in Ireland also helped keep the mood edgy ahead of the result of a by-election that could prove crucial in passing the country?s 2011 budget.
Adding to Ireland?s woes, one of Europe?s biggest clearing houses raised its charges for trading the country?s bonds for the third time in as many weeks.
LCH.Clearnet announced it would be raising its margin requirement on Irish bonds from 30 per cent to 45 per cent.
The yield on the Irish 10-year government bond rose above 900 basis points to its highest level since the launch of the euro while Portugal?s held above 700bp ? above the level at which Ireland and Greece stopped accessing bond markets.
The Spanish 10-year yield has shot up in recent days and was above 500bp on Thursday. Indeed, there was a sense in the markets that Spanish debt was looking increasing vulnerable.
Divyang Shah, strategist at IFR Markets, noted a continued widening in the bid-offer spread on Spanish debt, which he argued was an early warning indicator for stress.
?While the bid-offer spread on 10-year Spain is still below the wides seen in May, the concern is over the speed at which things are becoming illiquid,? Mr Shah said.
Several analysts highlighted that the worsening peripheral debt crisis was threatening to curtail the policy normalisation under way in the eurozone ? even amid recent signs that the region?s economic recovery was holding up.
This, according to Greg Gibbs at RBS, posed a conundrum for the European Central Bank.
?Should we view the good data in the core that is lifting the average as a reason for optimism in Europe and a reason to tighten policy?? he asked. ?Or does the risk of setting policy for the average ? that appears to be underpinned virtually entirely by the two large core countries ? threaten to exacerbate the risk of financial crisis in the periphery??
He added: ?Attention on the ECB policy meeting next week will intensify.?
Jennifer McKeown, of Capital Economics, said that with the region?s governments supposedly dealing with the fiscal crisis, the ECB would probably focus more on positive economic data and continue to phase out its unconventional policy support.
?But it will not be long before growth falters throughout the region,? she said. ?Once that happens, we hope that the ECB will be prepared to join other central banks with bolder unconventional measures.?
In spite of the pressure on peripheral bonds, the euro had a relatively stable session. The single currency slipped back towards a recent two-month low against the dollar in early trading but recovered to end the European session little changed.
Equity markets also had a broadly positive session, although the lack of a lead from the US made for thin trading conditions.
The FTSE Eurofirst 300 index rose 0.5 per cent, in spite of further losses for some peripheral region banking stocks.
The FTSE 100 in London gained 0.7 per cent. In Tokyo, the Nikkei 225 Average added 0.5 per cent to near a five-month high while Shanghai climbed 1.3 per cent.
Commodity prices moved higher with the US oil price back above $84 a barrel and copper more than $8,300 a tonne. Gold held steady above $1,370 an ounce.
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