* Bund futures hit record highs; Spanish yields up * Concerns revolve around Spain's banks, funding costs * Spain finds domestic buyers for bonds at higher yields * Some investors take profit on Bunds By Emelia Sithole-Matarise and Marius Zaharia LONDON, May 17 (Reuters) - Spanish bond yields rose on Thursday as concerns about the country's banks and a rapid rise in its borrowing costs kept investment flows directed towards perceived safe havens, driving German Bund futures to record highs. A Spanish auction, strongly supported by domestic banks which placed bids at market levels, did little to change broad views that Spanish yields are likely to rise further in coming weeks. Borrowing costs rose by more than one percentage point for two of the three bonds that were sold, suggesting yields are rapidly heading to unaffordable levels. Greece's political crisis has also heightened anxiety and Spanish banks, under pressure to make more provisions for bad property loans, may not be as willing to spend money on government debt as they have been earlier this year. Spain's 10-year yields were last six basis points higher at 6.37 percent, its five-year yields were 8 bps up at 5.47 percent and two-year yields rose 10 bps to 4.23 percent. "These levels are not sustainable for a long period of time. We're also in a very difficult phase with the uncertainty about Greece," said Riccardo Barbieri, rates strategist at Mizuho. "We are likely to be higher in a few days' time unless someone does something about it. If we get to levels that are close to the previous highs (near 7 percent) I believe the European Central Bank will step in." Spanish 10-year yields have risen by around 15 bps per week on average since the beginning of March, when the country agreed a higher 2012 budget deficit target with the European Union. With one month to go until new Greek elections, some analysts fear that yields could soon reach the panic-triggering 7 percent, beyond which countries like Portugal or Ireland have been shut out of bond markets. Greek leftists opposed to the terms of the country's international bailout package are expected to do best in the vote, raising fears that Greece will default and crash out of the euro zone. In Italy, also vulnerable to contagion from the Greek crisis, 10-year yields rose as high as 6.06 percent before settling slightly below 6 percent. "HORRIBLY EXPENSIVE" Bund futures hit record highs again, rising as high as 143.79. They settled at 143.67, 49 ticks up on the day while German 10-year yields plumbed an all-time low of 1.414 percent. Barbieri at Mizuho said they could fall as low as 1.25 percent if they sustain the break below 1.50 percent. For some investors, though, the air is getting too thin for comfort around such peaks. Russell Silberston, who manages around $30 billion worth of fixed income assets as head of global interest rates for Investec AM, said he has been selling Bunds for the past few weeks. "We think Bunds are horribly expensive. If we get some sort of solution like common bonds for example ... we can see a big sell-off," he said. "The risk-reward is such that we have been taking profits on those and sitting neutral." Silberston has bought French bonds this week, seeing an opportunity in the recent widening of French/German yield spreads. He also remains exposed to Dutch and Finnish bonds as he thinks those countries can pay back debts even if the euro zone breaks up. "It is a credit decision at the end of the day. Are we going to take our money back if we invest in those? I think so," Silberston said.

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