* Spanish yields rise after Rajoy bailout comments
* Risk aversion drives Bunds more than a point higher
* German auction uncovered; Italy sale seen going well
By Marius Zaharia and Ana Nicolaci da Costa
LONDON, Sept 26 (Reuters) - Spanish government bond yields broke above 6 percent and safe-haven German Bunds rallied on Wednesday as markets put pressure on Madrid to ask for a bailout and secure central bank support for its debt.
Spain’s Prime Minister Mariano Rajoy said he was ready to seek a rescue package but only if debt financing costs remain too high for too long.
His apparent hesitation to request a bailout, a move that has seen prime ministers elsewhere in Europe lose their jobs, coincides with anti-austerity protests bursting in Madrid.
“It was a bit short-sighted from Rajoy to say that. It’s almost like inviting markets to push interest rates higher,” said Norbert Wuthe, rate strategist at Bayerische Landesbank.
“I guess it’s a matter of a few days or weeks until they get into a situation where they are forced to make a move.”
Spanish 10-year government bond yields were last 28 basis points higher at 6.06 percent. Two-year yields rose 25 bps to 3.48 percent.
A joint declaration by Germany, the Netherlands and Finland on Tuesday that appeared to unravel much of what was agreed at the last European summit in June has also done some damage on peripheral bond markets.
The statement set out the terms under which those countries would be willing to allow the euro zone’s permanent rescue fund, the ESM, to recapitalise at-risk banks. But it referred to future banking problems, not the current ones.
Bonds issued by Spain and Ireland - both of which had interpreted the June summit as implying that a way would be found to break the debilitating link between their indebted banks and government debt - underperformed other euro zone debt.
“It’s a risk-off day but cracks (in the summit conclusions) are particularly negative for Spain and Ireland, so that’s the extra kicker,” one trader said.
The yield on Ireland’s October 2020 bond rose 17 basis points to 5.21 percent.
The risk-averse environment spurred a rally in Bunds, even after a 10-year German debt auction failed to attract enough bids to meet its 5 billion euro target.
Nick Stamenkovic, bond strategist at RIA Capital Markets, described the auction as “pretty sluggish.”
“It clearly shows investors were reluctant to bid at those yield levels,” he said. “Bund yields dropped quite sharply in the past few days.”
“Over the medium term, if the ECB measures begin to work and there is more movement towards a political union, yields could rise. But for the moment safe-haven flows dominate.”
In the secondary market, 10-year yields were 14 basis points lower at 1.45 percent, having fallen from around 1.7 percent just over a week ago. Bund futures were 151 ticks higher at 141.57.
The current mood may put an Italian bond auction on Thursday under closer scrutiny, but analysts generally expect the sale of up to 7 billion euros of five- and 10-year debt to draw adequate demand.
“While Spain and Italy are moving in the same direction, markets are differentiating between the two,” Bayerische Landesbank’s Wuthe said. “I don’t think Italy will suffer too much at the auction, it is only after Spain gets a rescue package that markets are going to focus on Italy.”
Italian 10-year yields rose 10 bps to 5.21 percent.