Spanish Bond Yields Rise On Labor Unrest, Bailout Fears

A general strike by union workers and a looming national deficit pushed Spanish bond yields up Thursday, leading investors to question if the country will be the next weakest link in the euro zone.

The yield on Spain's 10-year bond was up 12 basis points, or 0.12 percentage point, to 5.42 percent by late afternoon in Europe, the highest level in a week.

The yield, which determines the government's borrowing costs, has shot up from 4.87 on March 1, after Prime Minister Mariano Rajoy said Spain would miss its deficit target in 2012.

Spain is also heavily connected to its Iberian peninsula neighbor, Portugal, another troubled economy that could drag Spain down with it. A faltering economy could cause Spain to seek a bailout from the European Union or International Monetary Fund.

“The economic situation in Spain is gloomy,” Sercan Eraslan, a fixed-income strategist for Germany's WestLB AG told Bloomberg News. “There’s speculation about Spain and Portugal, and that’s the main driver today for Spanish and Italian debt.”

Unions protested Thursday in response to potential austerity measures from the Spanish government that include measures to make it easier to fire workers. Spain's unemployment rate is 23 percent, the highest in the 17-member euro zone.

Italy, until recently seen as highly vulnerable among euro zone economies, saw its borrowing costs ease to a seven-month low after it sold €8 billion ($10.6 billion) of securities that will mature in 2017 and 2022 on Wedneday. Its 10-year-bond yield rose 18 basis points to 5.21 percent Thursday.

Germany, the strongest euro zone economy, had 10-year bond yields fall 2 pecentage points to 1.80 percent Thursday.

Finance Minister Cristobal Montoro will present Spain's 2012 budget on Friday, detailing how the country plans to combat its deficit.