The move by S&P has soured sentiment in the euro-zone periphery, and pulled Italian bonds lower ahead of Italy's month-end bond auction, seen as a critical test of demand for lower-rated debt. The euro also came under pressure after the downgrade, which was announced late in the U.S. session Thursday.
The Spanish 10-year bond yield climbed by 16 basis points to 5.94%, while the yield on the corresponding Italian bond was 13 basis points higher at 5.74%.
Spanish yields had fallen this week after a solid Dutch bond auction eased euro-zone tensions, but Friday's sharp increase has reversed that decline.
S&P lowered its rating on Spain by two notches to triple-B-plus, highlighting the risks posed to the country's efforts to bring its budget deficit under control, and bringing it into line with the firm's view on Italy.
"The market was already pricing in a rating downgrade for Spain, as in the 10-year bucket Spain is trading through [yielding more than] Italy. However, the rating downgrade will increase the pressure on Spanish yields in prospect of next week's auctions," said Alessandro Giansanti, an interest rate strategist at ING.
The S&P action is also likely to heighten tensions during Italy's bond auction at 0900 GMT, when it plans to sell up to EUR6.25 billion of bonds of various maturities.
The euro took a hit on the news in late New York and early Asian trade Thursday, quickly falling some 0.4% to about $1.3180 against the dollar. But the losses have since slowed and by 0705 GMT Friday the single currency was trading at $1.3261.
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