Spanish and Italian sovereign debt yields climbed Monday, as the countries carried out bond auctions, though Italy fared better between the two nations.
The Italian Treasury raised a total of 5.25 billion euros at a bond auction, meeting the top of a planned issue range of 3.50-5.25 billion euros.
Italy sold its three-year benchmark at an average 3.91 percent yield, the highest since January but below market levels of around 4 percent at the time of the auction.
It also sold three lines due in 2020, 2022 and 2025 which it has stopped issuing on a regular basis.
Demand for the three so-called off-the-run bonds totaled more than twice the 1.75 billion euros sold in total.
Spanish Yields Up on Greece, Reform
Spain's short-term debt costs rose on Monday and its benchmark premium over German bonds hit a euro era high, with Madrid's newest banking sector clean-up failing to allay the concerns of investors also unnerved by political deadlock in Greece.
The Treasury raised 2.9 billion euros ($3.8 billion) in 12- and 18-month Treasury bills, just under the top of the targeted range. Yields on the shorter paper rose by around a seventh from the last primary auction in April to just under 3 percent.
Addressing a problem at the heart of the euro zone debt crisis, Spain's government on Friday announced its second financial sector reform in three months to calm market fears that the country's banks face an unbridgeable funding gap.
The lenders were told to put aside 30 billion euros in funds to cover soured loans to property developers, above and beyond 54 billion euros of provisioning against toxic real estate assets ordered in February.
But with the country struggling to meet deficit reduction targets and facing recession and massive unemployment, investors doubted that a long-term solution had been found.
"Slightly disappointing couple of auctions, with a weak cover in both and shy of the maximum target. In the current environment in Spain in the banking sector and the extra provisions being asked, these auctions are not really a great source of confidence for the market," said Mark Miller, economist at Capital Economics.
The premium investors demand to hold ten-year Spanish over the equivalent Bund to its highest level since the introduction of the euro on Monday at around 483 basis points.
European shares also traded sharply lower as Greece's failure to form a government left the country's future membership of the euro zone uncertain.
Spain sold 2.2 billion euros of 12-month T-bills at a yield of 2.985 percent, up from 2.623 percent last month, and with the bills 1.8 times subscribed, compared with 2.9 times in April.
The Treasury auctioned 711 million euros of 18-month bills at a rate of 3.302 percent, after 3.110 percent last month. The bid-to-cover ratio was 3.2, again lower than April's 3.8.
Spain faces a tougher test on Thursday when it sells 3- and 4-year bonds, where it may need to rely on domestic buyers to get the bonds away, with foreign investors put off by concern about the country's longer-term stability.
Spain has already reached over half of its total gross debt issuance target this year, taking advantage of cheap liquidity from two European Central Bank 3-year loan tenders in December and February worth over 1 trillion euros.
Domestic banks have sharply increased their exposure to Spanish sovereign debt since the ECB liquidity measures, while international banks now hold a smaller proportion of Spanish bonds.
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