Spain's bonds slumped, with 10-year yields rising to a euro-era record, after Moody's Investors Service cut the nation's credit rating to one step above junk, citing its rising debt burden and weakening economy.

Italy's 10-year yield reached the highest level in almost five months after its borrowing costs surged at a sale of 4.5 billion euros ($5.65 billion) of three-, seven- and eight-year notes. Spanish 10-year bonds have dropped all four days this week after the nation requested as much as 100 billion euros of aid for its banks last weekend. German bunds gained.

The “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.”