Bond markets sputter

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The talk of the town -- any town in the financial district -- is the European bond market, which has shown the world this week that it knows how to sputter.

Demand was modest for Spanish bonds even as yields rose, sending a reverberating chill through financial markets. In the wake of the European Central Bank's two cash injection efforts, banks are providing an essential litmus test.

More than 800 banks participated the most recent Long Term Refinancing Operations [LTROs], which allowed them to gobble up government bonds that offered higher returns. The program could be viewed as answering the question of just how far $1 trillion will go. The answer is, it goes along ways, but it still runs out at some point.

"The medicine is wearing off. LTROs were a sizable boost but only a temporary one," Richard McGuire, a senior interest-rate strategist at Rabobank International told The Wall Street Journal.

France got into the act, auctioning slightly more than $11 billion in long-term government bonds Thursday. With demand relatively strong, yields on 10-year benchmark notes hit 3 percent.

Analyzing the risks, The Wall Street Journal pointed to an upcoming presidential election and public sentiment that is leaning toward debt reduction, as opposed to economic stimulation. A double-dip recession in Europe is clearly the white elephant of the week and Britain is potentially there already. Adage for the notepad: It is hard to bet on a country when uncertainty is the mood of the day.

Benchmark Spanish bonds peaked at 5.81 percent, listed Thursday at 5.7 percent on Tradeweb. In Italy, 10-year notes settled at 5.34 percent after peaking at 5.48 percent.

It turns out, the ECB and the revamped rescue European Union rescue package calmed jitters, but only temporarily. To make that go away, economies have to move forward. Cutting debt and watching a double-dip recession set in simultaneously is no one's idea of a good time. With the approach of the corporate reporting season, it seems clear that Europe is not going to give up the spotlight just yet.

In international markets Thursday, the Nikkei 225 index in Japan dropped 0.53 percent, while the Shanghai composite index in China rose 1.74 percent. The Hang Seng index in Hong Kong shed 0.95 percent, while the Sensex in India lost 0.63 percent.

The S&P/ASX 200 in Australia fell 0.33 percent.

In midday trading in Europe, the FTSE 100 index in Britain shed 0.37 percent, while the DAX 30 in Germany gave up 0.9 percent. The CAC 40 in France slipped 0.5 percent, while the Stoxx Europe 600 slipped 0.49 percent.