Irish bond yields rose for the tenth day in a row today ahead of EU economic commissioner Olli Rehn’s visit to Dublin.
The risk premium demanded by lenders on Government 10-year bonds rose to 7.87 per cent this evening, a record 5.48 percentage points ahead of the rate paid by Germany.
Last week the spread reached 5.34 per cent, the most since Bloomberg began collecting the data in 1991, before narrowing to 5.2 per cent.
"Irish debt is trading poorly, along with Portugal, and that lends support to bunds," said Peter Schaffrik, head of European rates strategy at Royal Bank of Canada Europe in London. "There are clearly concerns over the current Irish budget, the plan and the political support."
NCB Stockbrokers said it was “increasingly likely" that Ireland would have to seek aid from the European Union-backed rescue fund (EFSF).
"When your sales force doesn't believe it can drum up sufficient demand for Irish bonds at feasible rates, it gives an indication of sentiment," NCB chief economist Brian Devine said today, referring to comments by primary dealers in Irish bonds.
"It is increasingly looking like the European Financial Stability Fund is the most likely scenario."
The Government, which said it needs €15 billion in savings over the next four years, is struggling to convince investors it can reduce its budget deficit and cover the cost of bank bailouts without outside help.
Mr Devine said tapping the EFSF may be a "positive for both the Irish economy and the bond market" as long as the government can retain control of its tax policy, especially its 12.5 per cent corporate tax rate.
However, investment bank Nomura sounded a more upbeat note, suggesting bond yield premiums demanded by investors to hold Irish and Portuguese debt may stabilise.
"This crisis, fuelled by little true news, has entered a new phase and we expect some shorter-term stability," a team of analysts in London wrote in a research report today.
Nevertheless, Greek bonds also rose after prime minister George Papandreou ruled out calling snap election after a first round victory in local elections.
"Bunds are being driven by concerns over the peripherals," said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt.
"The market is focusing on these issues after last week concentrating on the Federal Reserve and its quantitative easing."
German bonds have returned 8.6 per cent this year, compared with an 8.9 per cent gain for US Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Greek debt has lost 18 per cent, Irish securities lost 9.9 per cent, while Portuguese bonds lost 7.9 per cent, the indexes show.
The euro fell against the dollar on the back of solid US jobs and renewed concern over euro zone peripheral debt.
With the US Federal Reserve's decision to launch more quantitative easing out of the way, euro zone debt problems seemed to have reappeared on traders' radars.
The euro dropped 0.5 per cent to $1.3953, after triggering stops as it fell through $1.4010 and $1.3990, its low of last Wednesday when the Fed said it would increase its asset purchases.
Some experts said the euro could fall towards $1.3750, having hit a late October low of $1.3756.
Euro/yen selling out of Tokyo was also said to have helped send the single currency lower, which in turn weighed on other currencies against the yen.