LONDON: Dutch and peripheral euro zone bonds sold off on Monday, driving Spanish yields back above 6 percent, as a political crisis in the Netherlands stoked investor fears euro zone commitments to contain the debt crisis were under threat.
The premium investors demand to hold Dutch bonds rather than German benchmarks surged to its highest in three years after the Dutch government failed to agree budget cuts, making an early election almost inevitable.
Two broadcasters said the government would resign on Monday.
Data showing the euro zone's private sector shrank faster than expected in April piled pressure on the region's fragile debt, pushing German Bund yields to record lows and benchmark US yields to seven-week lows as investors sought safety in highly liquid low-risk bonds.
Traders and strategists saw little respite for non-German debt in coming days with investors worried Socialist Francois Hollande - who won the first round of France's presidential poll on Sunday - might loosen his country's commitment to austerity.
"Until we see a new coalition cobbled together in Holland and signs they are going to take action to cut the budget deficit over the medium-term investors are going to be nervous over Dutch bonds," RIA Capital Markets strategist Nick Stamenkovic said.
"PMI surveys are also highlighting the fragility of the euroland economy and on top of that there's underlying nervousness of Spain's fiscal position going into Spain's bill auction tomorrow and the Italian auction later in the week."
Dutch 10-year yields were up 8 bps at 2.395 percent, pushing their spread over Bunds to 73 bps , the widest since April 2009, according to Reuters data.
The cost of insuring against a Dutch default jumped to its highest since mid-December, with some in the market concerned the country could lose its triple-A credit rating if it fails to meet budget targets.
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