RTRS:EURO GOVT-Dutch debt leads broad sell-off as crisis spreads
* French vote, Dutch political problems add to crisis nerves
* Dutch/German 10-year yield spread highest in three years
* Bund futures hit record high
By Emelia Sithole-Matarise
LONDON, April 23 (Reuters) - Dutch and peripheral euro zone bonds sold off on Monday, driving Spanish yields back above 6 percent, as the Netherlands slid into political crisis, stoking investor fears the euro zone's efforts to contain the debt crisis were under threat.
The premium investors demand to hold Dutch bonds rather than German benchmarks surged to its highest in three years after the Dutch government failed to agree budget cuts, making an early election almost inevitable.
Data showing the euro zone's private sector shrank faster than expected in April piled pressure on the region's fragile debt, pushing German Bund yields to record lows and benchmark U.S. yields to seven-week lows as investors sought safety in highly liquid low-risk bonds.
Traders and strategists saw little respite for non-German debt in coming days with investors worried Socialist Francois Hollande - who won the first round of France's presidential poll on Sunday - might loosen his country's commitment to austerity.
"Until we see a new coalition cobbled together in Holland and signs they are going to take action to cut the budget deficit over the medium-term investors are going to be nervous over Dutch bonds," RIA Capital Markets strategist Nick Stamenkovic said.
"PMI surveys are also highlighting the fragility of the euroland economy and on top of that there's underlying nervousness of Spain's fiscal position going into Spain's bill auction tomorrow and the Italian auction later in the week."
Spain, which has been at the forefront of the latest flare-up in the debt crisis as it struggles to stabilise its fiscal position in the face of recession, saw its 10-year yields top 6 percent for the second session running.
A sustained break of that level could see borrowing costs accelerate to unaffordable levels which drove Greece, Ireland and Portugal to seek international bailouts.
French bonds underperformed German benchmarks, widening their 10-year yield spread 9 basis points to 154 bps. Stamenkovic said the spread could expand to 180 bps heading into France's May 6 presidential run-off, which Hollande is tipped to win.
"As much as there is a microcosm of relief that the second round will be contended by Sarkozy and Hollande it still puts France on a collision course with Germany over the future of the euro," said Marc Ostwald, a strategist at Monument Securities.
"And it's not going to help resolve moving towards fiscal union and the market's concerns that the only solution is eurobonds."
The June Bund future was last 47 ticks up at 140.86, having risen as high as 140.97 earlier. Cash German 10-year yields were 3 bps lower at 1.594 percent. They hit a low of 1.585 percent.
