Greek drama: Bond yields near 9% threshold

Greek government bond yields spiked beyond 8 percent on Thursday, in a sign of growing concern about the country's economic stability given the possibility of snap elections and plans to exit its bailout early.

The 10-year note yielded 8.9 percent on Thursday at Europe market close, well beyond the 7 percent-threshold which many analysts believe is unsustainable. It is the first time yields have passed this point since January. On Wednesday evening, the sovereign note yielded 7.863 percent.

Read MoreThree things about Greece you need to know

The volatility comes amid growing concerns about Athens' plans to exit its bailout ahead of schedule. On Saturday, Prime Minister Antonis Samaras won a confidence vote in parliament, forcing lawmakers to back his plans to exit its international aid program early -- a prospect that is looking increasingly unlikely.

Is the market sell-off warranted?
Is the market sell-off warranted?

Samaras' government has also been plagued by the prospect of snap elections early next year if the prime minister fails to gain the support of opposition lawmakers for his candidate for president. A promise to exit the painful program early was key in securing that backing.

The concerns have led to a turbulent few days for Greek markets, with the Athens' benchmark index tanking up to 9 percent on Wednesday. On Thursday, the ASE closed down around 2.2 percent lower and is now down around 25 percent this year. It also proved to be the spark that turned markets south on Thursday morning after equities bounced back slightly at the session open.

"This smacks of the 'risk off' move of old," Richard McGuire, a senior rate strategist at Rabobank told CNBC via email. "The peripherals are under pressure across the board which is potentially an alarming sign that fundamental risk is returning."

Read MoreEuro zone crisis 2.0? Greek stocks tank

In a bid to free up some more money for the country's banks, the European Central Bank cut the haircut it applies on bonds submitted by Greece's banks as collateral to raise money. The new discount meant an extra 12 billion euros of liquidity could be tapped by Greek banks, the country's central bank governor Yannis Stournaras told reporters.

Meanwhile in the the country's parliament, Finance Minister Gikas Hardouvelis dealt directly with the sellof, saying that it did not reflect the fundamentals of Greece's economy

"I believe that we can make it. If we stay calm, if we are focused on our targets, if we have the widest possible political consensus, we can exit the crisis, a lot faster than expected, " Hardouvelis said, according to Reuters news agency. "Those monitoring markets know that very often they are nervous, excessive in their reactions."

'Clear warning' to Greece

Investors are giving Greece a clear warning that they are not happy with the current political risk in the country, according to AvaTrade Chief Market Analyst Naeem Asla.

"The spotlight is back on Greece again who wants to be out of their bailout program earlier than anticipated, " he told CNBC via telephone. "The questions which are being asked by traders is if they have money enough to come out of this bailout program much sooner than planned because this could trigger a need for nearly 25 billion euros which they do not have."

He said that market participants wanted clarity on the power struggle in Greece's government and what the contingency plans were in regards to monetary policy in the country.

Read MoreEU: Will continue to support Greece after bailout

Although very few investors are buying long-dated Greek sovereign debt at the moment, the yield on the 10-year note is still seen as an indicator of investor sentiment in the country. The current 8 percent level is also some way off the 30 percent-plus the yield hit at the height of Greece's debt restructuring in 2012.

Stock Exchange displays show stock price movements in Athens, Greece
Milos Bicanski I Stringer I Getty Images

The European Commission moved to ease concerns over Greece on Thursday morning. The Commission's spokesperson Simon O'Connor said that it would continue to assist Greece in whatever way is necessary and would ensure a smooth evolution of support for the country after its bailout program finishes.

"It's an interesting day's play in prospect," Bill Blain, a fixed income strategist at Mint Partners told CNBC via email. "We are seeing Greece gapping down because no one is prepared to bid."

Studying the yields on each euro zone peripheral country, he believes that Greece is causing contagion as investors figure out that the sovereign bonds in Italy and others could be tough to shift if there's a lack of buyers.

- By CNBC's Katrina Bishop

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Is the market sell-off warranted?
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