Italy's 10-year yield was little changed at 6.21 percent after advancing to 6.34 percent, the most since Jan. 20.

Moody's lowered Spain's credit rating to Baa3 from A3 and put it on review for a further downgrade. The request for aid from the European Union to recapitalize its banking system adds to the government's debt load, it said yesterday.

The company also lowered Cyprus's bond rating to Ba3 from Ba1, saying there was a material increase in the likelihood of a Greek exit from the euro area, and a rise in the probable amount of support the government may have to extend to Cypriot banks.

Greece will hold an election on June 17 that may lead to it becoming the first nation to exit the 17-nation currency union.

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity bunds widened 23 basis points to 549 basis points after reaching 551 basis points, also a euro-era record. Italy's 10-year spread over Germany expanded three basis points to 476 basis points from as narrow as 276 basis points on March 16.

German 10-year yields fell two basis points to 1.47 percent. They dropped to a record 1.127 percent on June 1.

Spanish Borrowings

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.

While a 10-year yield of seven percent “is a psychologically significant level for the market, it isn't necessarily for Spain's funding program,” Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, said in an interview with Guy Johnson on Bloomberg Television's “The Pulse.” “It only reinforces a further selloff when people see a 7 percent level.”

Italy sold 3 billion euros of three-year notes at an average yield of 5.30 percent, up from 3.91 percent at the previous auction on May 14. Investors bid for 1.59 times the amount allotted, versus 1.52 times last month. The nation sold 4.5 billion euros of debt in total, meeting its maximum target.

“The trend in yields and spreads is something which requires something from the policy-maker level to reverse,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

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 outline new measures aimed at spurring the economy.

The trend in Italy's government bond futures is “bearish while they trade below the 99.32 mid-point” of their decline from 102.21 on June 7 and the low of 96.43 on June 12, Richard Adcock, head of fixed-income technical strategy in London at UBS AG in London, wrote in a note to clients. “As long as this remains the case the expectation is for limited bounces and further price weakness.”

The contracts were little changed at 97.13 after dropping as much as 0.9 percent to 96.21.

Spanish bonds have handed investors a loss of 5.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt returned 2.5 percent, and Italian bonds rose 5.4 percent.

Volatility of French bonds was the highest in the euro-area markets today followed by Spain and Ireland, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.

Bloomberg News

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