Spain's short-term borrowing costs jumped at a sale of more than €3-billion of short-term government debt on Tuesday, reflecting fears about the country's finances and boding ill for a key long-term debt auction later in the week.
The Spanish Treasury sold €3.2-billion of 12 and 18-month bills, just above its target range of 2-3 billion in sales a reasonable demand from investors a day after the country's key 10-year bond yield hit a five-month high above 6 per cent.
But it was forced to pay a stiff premium compared with a month ago. The yield on the 12-month bill was 2.623 per cent compared with 1.418 per cent at the last sale on March 20, and 3.110 per cent on the 18-month bill, up from 1.711 last month.
The sales were in sharp contrast to the country's debt auctions in the first quarter of the year as banks, backed by a wall of cheap European Central bank cash, put some of it to work in debt of countries at the fringes of the euro zone.
The next big test is the auction of longer-term paper on Thursday.
"The key was again domestic bank bidding ... But it doesn't change the bigger picture too much. The key will be the bond auction on Thursday," said Michael Leister, rate strategist at DZ Bank.
Spain has eased its debt problem somewhat by selling close to 50 per cent of its planned issuance of medium and long-term debt for the year, which will give the Treasury some comfort even if yields will likely rise at Thursday's bond sales.
International investors continue to steer clear from Spain's debt, leaving domestic banks as the main buyers.
At the end of February, non-residents held 42 per cent of Spanish public debt, the lowest level since 2007 and down from 50 per cent in December, Treasury figures show.
Analysts said national banks continued to support the auctions. The bid-to-cover ratio, an indicator of investor demand was 2.9 on the 12-month bill, compared with 2.1 last time, and was 3.8 on the 18-month bill, up from 2.9 in March.
Yet this was not seen as necessarily positive for Thursday.
"Over all, these results are unlikely to provide any impediment to the current bid tone in peripherals but they do not guarantee a positive outcome as regards the more important litmus test for Spanish investor appetite looming in the form of Thursday's sales," said Richard McGuire, at Rabobank.