Spain’s 10-year borrowing costs rose to a euro-era record as the nation’s credit rating was cut to one step above junk by Moody’s Investors Service after it asked for aid to support its lenders earlier this week. Italy’s yields reached the highest in almost five months before auctions of as much as 4.5 billion euros ($5.7 billion) of three-, seven- and eight-year notes. The country’s borrowing costs climbed at a sale of 12-month bills yesterday. Moody’s lowered Spain’s rating three steps to Baa3 citing the nation’s debt burden, weakening economy and limited access to capital markets. It also downgraded Cyprus. German bunds fell. “The debt markets are telling us that they’re unconvinced by the bank bailout and that the next step is that the government will have to concede, capitulate, and go for a sovereign loan,� James Stewart, head of macro research at AX Markets in London, said in an interview with Mark Barton on Bloomberg Television’s “Countdown.� “That seems to me quite likely, and even now I think it’s moving on from Spain to Italy.� Spain’s 10-year yield climbed 15 basis points, or 0.15 percentage point, to 6.91 percent at 9:24 a.m. London time, the highest since before the euro was introduced in 1999. The 5.85 percent security maturing in January 2022 fell 0.995, or 9.95 euros per 1,000-euro face amount, to 92.715. Italy’s 10-year yield rose six basis points to 6.27 percent, after advancing to 6.34 percent, the most since Jan. 20. The yield on Cyprus’s 3.75 percent note maturing in June 2013 climbed three basis points to 41.68 percent. Debt Burdens Europe’s policy makers are struggling to find a way to stem the financial-market turmoil after an agreement on a 100 billion-euro bailout of Spain’s banks on June 9 failed to boost sovereign debt prices. Spanish and Italian yields are also rising as Greece prepares to holds an election on June 17 that may lead to it becoming the first nation to exit the 17-nation currency union. Spanish lenders’ net average borrowings from the European Central Bank rose to a record 287.8 billion euros in May from 263.5 billion euros in April, Bank of Spain data showed today. The yield difference between Spanish 10-year debt and similar-maturity German debt has widened to 542 basis points, from about 245 basis points a year ago on concern the nation will struggle to curtail its debt burden. Italy’s 10-year spread over Germany is 478 basis points, compared with 175 basis points last year. Volatility on Spanish bonds was the highest in the euro- region markets, followed by Italy, according to measures of 10- year debt, the spread between two- and 10-year securities and credit-default swaps. Italian Auction German 10-year yields advanced one basis point to 1.50 percent. The rate has climbed from a record-low 1.127 percent on June 1. Italy will sell as much as 3 billion euros of 2.5 percent bonds maturing in March 2015. It will also auction a 4.25 percent bond due in March 2020 and a 4.25 percent security maturing in February 2019. The nation “might be forced to make some concessions regarding the volume in order to get a satisfactory bid-to-cover ratio and actually find enough demand,� said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. The bid-to-cover ratio refers to the amount of investor demand relative to the amount of debt sold. Italian Prime Minister Mario Monti yesterday called on European allies to do more to foster growth as a way to end the debt crisis and said his government would soon unveil new measures aimed at spurring the economy. Bond Futures Italy’s government bond futures contracts fell for a seventh day, dropping 0.4 percent to 96.68. The trend in futures is “bearish while they trade below the 99.32 mid-point,� of the move from 102.21 on June 7 and the low of 96.43 on June 12, Richard Adcock, London-based head of fixed-income technical strategy in London at UBS AG, wrote in a report. “As long as this remains the case the expectation is for limited bounces and further price weakness.� Italy sold 6.5 billion euros of one-year bills at a yield of 3.97 percent yesterday, up from 2.34 percent at the previous auction on May 11. Investors bid for 1.73 times the amount offered, down from 1.79 times last month. Spanish securities have lost 5.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt has returned 2.5 percent and Italian bonds rose 5.4 percent. To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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