The euro continues to recover from yesterday's falls and pressure on Spain's borrowing costs has eased, but the euro zone debt crisis still dominated sentiment with Portugal being put on credit watch.
European stock markets rallied, and government bond rates eased a day after Spanish and Italian government 10-year borrowing costs rose to a record wide gap above the rate euro zone benchmark Germany must pay.
The 10-year borrowing rate for Spain eased to 5.3% having reached 5.5% yesterday. The cost of borrowing for Italy also eased.
However, Portugal suffered another blow when its borrowing costs rose sharply in a government Treasury bill auction.
All the €500m in 12-month T-bills on offer in the auction were sold.
But yields rose to a euro lifetime record of 5.281% from 4.813% two weeks ago, demonstrating sagging investor confidence.
Portuguese officials insisted the country could survive without an international bailout.
Irish borrowing costs fell slightly today with the interest rate demanded by investors standing at 9.22% this afternoon.
Traders said the ECB was supporting the market through bond purchases, though the bank would not comment. There is speculation that the bank could unveil new anti-crisis measures after it meets tomorrow.
Ratings agency Standard & Poor's placed Portugal on a credit watch because of 'increased risks to the government's creditworthiness' as Europe's debt woes deepened.
S&P yesterday said increased risks came from the Portuguese government not doing enough to enact 'growth-enhancing reforms' and from proposed changes to EU rules that could mean private bondholders are last in line to be paid back.
Fears that Portugal could follow Ireland and Greece in receive a massive international financial bailout sent the euro sinking to a two-month low under $1.30 yesterday.
The euro was standing at €1.3099 this afternoon.
German bond issue undersubscribed: Bundesbank
A German bond issue today was undersubscribed, figures released by the central bank showed, a sign that even benchmark German debt has not been spared by the latest euro zone crisis.
Last week, an issue of 10-year German bonds, which are the euro zone reference, also met with offers for less than was available, amid heightened market tensions stemming from the Irish debt crisis.
This time, the German agency which manages the country's sovereign debt received offers for just €4.55 billion after tendering five-year bonds worth a total €5 billion, the central bank data showed.
In the end, the agency sold bonds worth €4.13 billion at an average rate of 1.73%.
Pressure has grown recently on Greek, Irish, Italian, Portuguese and Spanish government debt, while German bonds, the benchmark for high quality in the euro zone, normally benefit from full investor confidence.
