Spanish borrowing costs Thursday hit their highest levels since before the European Central Bank launched two massive liquidity injections to keep the euro zone's financial system from freezing up.
Ten-year yields on Spanish bonds jumped to 5.81 percent, the highest level since Dec. 1. A month ago, the rate was below 4.9 percent.
A dismal Spanish bond sale Wednesday heightened concerns about the country's finances, with investors seeing the effects of the ECB's generous liquidity injections, known as long-term refinancing operations (LTROs), which entailed lending billions of euros at ultra-low interest rates.
Spain sold €2.6 billion ($3.4 billion) of bonds, at the low end of its €2.5 billion to €3.5 billion target, and at yields that were well above previous auctions.
Budget Minister Cristobal Montoro presented the government's 2012 spending plan on March 30 and said public debt will rise to 79.8 percent of gross domestic product. That's the highest level since at least 1980, even as Spain prepares its deepest budget cuts in three decades.
Investors are worried Spain may need to seek a bailout similar to Greece, Portugal and Ireland. U.S. stocks were little changed from the previous session's sharp sell-off despite an encouraging report jobless claims fell to their lowest level in nearly four years; the nation's March unemployment level, however, is likely to have remained stuck at 8.3 percent when nonfarm payroll data is released on Good Friday.
Meanwhile, unemployment in Spain, where more than half of young people are out of work, rose for the eighth straight month in March to a record high. The government expects the annual unemployment rate to surge to 24.3 percent this year.
Investors fear that further hikes in Spanish bond yields could risk inflaming other peripheral bond markets. Yields on the Italian 10-year note climbed Thursday by 20 basis points to 5.50 percent.
A successful French bond auction on Thursday failed to ease the mounting concerns about the Spanish economy.
Even though France lost its prized AAA credit rating in January, its government bond yields have fallen since the start of the year as banks gorged on cheap funds provided by the ECB.
The French Treasury Agency sold €8.439 billion ($11.09 billion) of long-term government bonds, known as OATs, at the upper end of its €7 billion to €8.5 billion target range. But it had to pay slightly higher yields due to the uncertainty ahead of presidential elections and the grim euro zone outlook.
European markets failed to hold on to their early gains Thursday, with the DAX index of German stocks declining 0.8 percent in afternoon trading, to 6,730.64. The CAC 40 in France lost 0.07 percent, and the FTSE 100 in Britain fell 0.19 percent.