THE high-level squabble between the ECB and the European Commission left the debt market rudderless yesterday.
With open division at the highest levels in the eurozone, investors have little clue where the crisis is likely to strike next, making buying, or even selling, with confidence impossible.
The market for distressed sovereign bonds traded flat as the row and news of the row gathered pace. Irish 10-year bonds ended the session yielding 10.228pc, up slightly from 10.129pc on Wednesday.
Trading in Greek debt has almost completely dried up, traders said, with investors unable to call what the direction the market could go next.
Irish 10-year bonds were yielding 15.8pc last night, up from 15.6pc. Portugal's 10-year bonds saw even less change, ending flat at 8.9pc.
However, the cost of insuring Greek bonds against default hit an all-time high at 13.4pc per year to insure bonds for five years.
Spain held a bond auction yesterday and sold €3.219bn of 10-year and 30-year bonds, at 5.395pc for the 10-year bond and 6.002pc for the longer-dated paper.
Getting any interest in such long-term borrowing proved yet again that Spain continues to put clear water between itself and the three bailout countries.
Meanwhile, Pacific Investment Management Co, which manages the world's biggest bond fund, said it was "remarkable" that the new Solvency II rules for insurers did not impose a capital charge for European sovereign debt.
"The euro-land sovereign debt crisis -- as well as concerns about the sustainability of high debt levels in the western world, including the US -- have demonstrated that credit risk is everywhere," wrote Matthieu Louanges, executive vice-president at Pimco in Munich, in a report yesterday.
He continued: "It seems remarkable that the Solvency II directive does not foresee any capital charge for European sovereign debt holdings by insurance companies."
Regulators are seeking to impose common capital standards for insurers in different jurisdictions through rules known as Solvency II, which come into effect in 2013 and are aimed at preventing a repeat of the financial crisis.
Concern that eurozone governments will not be able to repay their debt has centred on Greece, which is struggling to meet the terms of last year's €110bn bailout.
"Currently, there is no differentiation between Greek and German debt quality, nor respect for credit ratings that are nonetheless used to calculate other capital charges," Mr Louanges wrote.
"The new regulators' zero credit-risk hypothesis for European government bonds is being tested by the markets, making the regulations -- which are supposed to promote a more risk-based approach -- appear self-contradictory."
Yields on 10-year Greek debt rose 22 basis points to 16.02pc in New York yesterday, widening the spread -- or yield difference -- over benchmark German bunds for a fourth consecutive day.