TOKYO: Shares and commodities slid while the euro fell to its lowest in almost two years against the dollar on Thursday, as surging borrowing costs in troubled Spain heightened fears that it would not be able to rescue its banks and may have to seek a bailout.
Investors fled from risk assets to U.S. government bonds, with the benchmark 10-year Treasury yield falling below 1.6 percent in early Asian trade on Thursday, its lowest in at least 60 years. The 10-year Japanese government bond yield hit a nine-year low of 0.810 percent.
Oil prices extended losses after falling more than 3 percent on Wednesday and copper hit 2012 lows.
"Investors were already exposed to the problems in Spain, but what really disturbed the market were oil prices and U.S. bond yields which broke out of range to hit long-period lows," said Lee Seung-wook, an analyst at Kiwoom Securities.
MSCI's broadest index of Asia-Pacific shares outside Japan tumbled as much as 1.6 percent to trade a whisker above a 2012 low marked last week. At current levels, the index is set to close the month down nearly 12 percent, the biggest monthly loss in eight months.
The losses in stocks meant some key Asian bourses - Hong Kong, Australia and Korea and Japan had wiped or were close to wiping out gains made for the year to date. Japan's Nikkei was down 1.8 percent on the day.
The dollar and the yen were also beneficiaries of escalating risk aversion although gold, a traditional safe-haven asset, struggled in the face of the greenback's strength.
A caution by Spain's central banker that Madrid will miss deficit targets for this year pushed Spanish 10-year yields above 6.7 percent, close to 7 percent, a level seen as unsustainable and which could push Spain to seek a bailout just as Greece, Portugal and Ireland have done.
The cost of insuring against a Spanish default scaled a record high near 600 basis points while Italy, which is also struggling with huge public debt, saw its 10-year yield top 6 percent for the first time since January.
Yields on all German bond maturities hit record lows on Wednesday, pushing the premium investors demand to hold Spanish debt over German debt to its highest since the launch of the euro at around 543 basis points.
EURO UNDER FIRE
The euro fell to a 23-month low of $1.2358 and a 4-1/2 month low against the safe-haven yen at 97.36.
"There is no exit in sight currently for the euro to get out of this downtrend because there is no shortage of negative news," said Hisamitsu Hara, chief FX manager at Bank of Tokyo-Mitsubishi UFJ.
"Problems in Spain, a large euro zone economy, heighten fears while the risk of Greece leaving the euro bloc raises contagion concerns. The euro remains depressed, with players cautiously testing the downside".
Hara added that the euro could weaken until support at the$1.19 level. The euro last dipped below $1.19 in June 2010.
The dollar index, measured against a basket of major currencies, extended its rally to 83.11, its highest since September 2010. The yen rose to a 3-1/2 month high against the dollar at 78.71.
Hara said wariness over Japanese authorities intervening to prop up the dollar was likely to prevent the U.S. currency from falling sharply further.
The dollar index was on the verge of closing above its 100-month moving average at 81.82, which would generate a buy signal which in turn could spur a sustained period of dollar strength for the next couple of years to as high as 101.00-106.00, some analysts said.
The index has in the past 30 years generated four successful buy signals which have resulted in significant dollar moves, they added.
The strong dollar and intensifying risk aversion sent the Thomson Reuters-Jefferies CRB index, a global benchmark for commodities, tumbling 1.7 percent to its lowest levels since September 2010 on Wednesday.
U.S. crude futures were down 0.2 percent at $87.62 a barrel on Thursday, after settling at a seven-month low. Brent crude fell 0.3 percent at $103.19 a barrel on Thursday after settling at a five-month low.
The European Commission threw Spain two potential lifelines, offering more time to reduce its budget deficit and offering direct aid from a euro-zone rescue fund to recapitalize distressed banks.
But any relief from the news was quickly offset by the latest Greece polls showing parties for and against a bailout neck-and-neck or very close to each another, ahead of a June 17 election that may decide whether Greece remains in the euro.
Asian credit markets weakened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 8 basis points. - Reuters
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