Spanish 10-year yields topped 6 percent on Friday before retreating after upbeat German economic data but a break higher was seen likely as investors worried about Madrid’s ability to deal with its fiscal problems.
Pressure on Spanish debt grew after a debt auction on Thursday fell short of market expectations, lifting Spain’s default insurance costs close to record levels. Ten-year yields were last at 5.97 percent, up 4 basis points on the day.
A sustained break of 6 percent in 10-year yields could see borrowing costs accelerate to unaffordable levels which drove Greece, Ireland and Portugal to seek international bailouts.
“Spain remains the main worry and if it breaks decisively 6 percent…that will get markets even more worried because after that there’s 7 percent where you get all the memories about Greece and Portugal coming back,” Lloyds strategist Achilleas Georgolopoulos said.
The latest flare-up in the euro zone debt crisis threatened to spread to Italy, where 10-year yields rose as high as 5.74 percent before falling back slightly.
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