2012.05.25 16:06:31 UPDATE:Spanish Bond Rally Reverses On Catalonia Worries

--Spanish bond yields driven higher on Catalonia woes --Semi-core and peripheral bond rally stalls And reverses --Bunds head back towards their record low yield levels (Adds news on Catalonia, new levels and additional commentary throughout.) By Nick Cawley Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Spanish government bond yields rose sharply and German debt yields fell early Friday afternoon on news that Spanish region Catalonia is having increasing difficulty financing itself and may need a central government debt guarantee, reversing an earlier rally in the semi-core and peripheral bond markets. "The news seems to have roiled the market, especially Spain," noted one trader, adding that while Spain had already said that it needed to raise a bond just for the regions, "it's no good that it is Catalonia, however, as it's the richest region in Spain." Spain's 10-year benchmark yield rose back to 6.25%, after having traded a shade under 6% earlier in the session, erasing a large chunk of Thursday's rally, according to data from Tradeweb. The yield on the French 10-year moved back to 2.50% from 2.44% while the Italian 10-year traded at 5.75%, up from Friday's earlier low around 5.60%. The cost of insuring Spain's government against default pushed wider to 549 basis points, 10 basis points wider on the day, in a turnaround from tighter opening levels, according to data-provider Markit. This means it now costs an average of $549,000 a year to insure $10 million of debt issued by the country. German Bund yields also turned and began to go back down towards the record-low yield levels seen earlier this week. The two-year Schatz was offering just under five basis points, the 10-year benchmark was quoted at 1.37%, just a couple of basis points off its all-time low, while in the long end of the market, the 30-year Bund was offered at 1.98% and heading back towards its low of 1.91%. Earlier Friday, yields on semi-core and peripheral government bonds extended Thursday's sharp fall on a combination of yield-hunting and short-covering, although some analysts had already questioned the sustainability of the move without any additional drivers. "As soon as the current bout of short-covering fades, any sell-off in safe-haven markets will be fairly limited and buying into any weakness should remain the key strategy until we get some form of positive policy reaction out of Europe," said Lloyds Wholesale and Banking Markets in its early morning note to clients. -By Nick Cawley, Dow Jones Newswires; + 44 (0)207 842 9374; nick.cawley@dowjones.com (Art Patnaude contributed to this article.) (END) Dow Jones Newswires May 25, 2012 10:06 ET (14:06 GMT)