Spain's bonds slumped, with 10-year yields rising to a euro-erarecord, after Moody's Investors Service cut the nation's creditrating to one step above junk, citing its rising debt burden andweakening economy.

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

The “markets are telling us that they're unconvinced by the bankbailout and that the next step is that the government will have toconcede, capitulate, and go for a sovereign loan,” James Stewart,head of macro research at AX Markets in London, said in aninterview with Mark Barton on Bloomberg Television's “Countdown.”“That seems to me quite likely, and even now I think it's moving onfrom Spain to Italy.”