The spiralling cost of Government borrowing hit a fresh high of 7.45pc yesterday as the European Central Bank (ECB) stepped in to calm the markets.
Germany's plan to get tough with bondholders, the failure to sell AIB's UK arm and fears that too much austerity could stifle the economy all added to the pressure on the bonds.
"The amount of selling has been relatively small, but the market is all sellers and no buyers, which drives up the yield. The ECB has come in to prevent this becoming a rout," said Padhraic Garvey, Head of Developed Markets Debt at ING Bank in Amsterdam.
Yields of more than 7.4pc mean Irish 10-year bonds that pay 5pc in interest per year are being bought for a little more than 83pc of face value. Irish yields have now risen for six days in a row.
Bondholders have been selling Irish and other higher risk sovereign bonds since Germany proposed tough new bailout rules last week.
Under German Chancellor Angela Merkel's plan, lenders to sovereigns that are bailed out by the EU would take a haircut on their debt. If approved by EU members the proposals would come into force in 2013.
The EU needs a mechanism to manage defaults but holding discussions about the plan at a time when the market is so vulnerable has mystified many observers.
Yesterday Ms Merkel said that for rules to have have "more bite" to protect the euro, along with steps to prevent EU nations running up excessive debt, a crisis mechanism enshrined in the bloc's treaties is necessary for the longer term.
"We will set it up in such a way that European taxpayers will no longer be on the hook for possible new mistakes and turmoil on the financial markets," Ms Merkel said.
Fears that Ireland's austerity plans could hurt the economy are also turning some bondholders off Irish bonds. "With austerity measures you're damned if you do and damned if you don't. The market wants to see the cuts but at the same time fears they will hurt the economy," said Mr Garvey.
That adds to pressure on Finance Minister Brian Lenihan to produce a four-year plan that convinces investors who are now abandoning Irish debt to buy back in.
If the cuts he proposes are too deep, investors fear there will not be enough growth in the economy to revive the banks. If cuts are too shallow, investors won't believe the deficit can be brought under control.
The cost of insuring Irish bonds against default also hit a new high yesterday.
Credit Default Swaps (CDS) that insure bondholders against a default in the next five years cost 5.3pc early yesterday. This means a bondholder has to pay €530,000 to insure €10m of bonds against default. Bad news from AIB was one factor in the rising cost of insuring Irish bonds, which rose more sharply than Greek or Portuguese CDS, said Gavan Nolan, credit analyst at research firm Markit.
"The banking situation is an extra factor in Irish risk.
"On Tuesday Ireland underperformed the other peripherals after AIB said it could not sell its UK assets.
"That adds to the cost of the bank bailout for Ireland at a time when the sovereign debt market was already very nervy," Mr Nolan said.