SPAIN’S FIVE-YEAR borrowing costs hit new euro-era highs at an auction yesterday, while France paid less than 1 per cent for similar bonds.

The 6.459 per cent yield on Spain’s July 2017 bond was almost 40 basis points higher from the previous sale just a month ago, at levels not paid by the treasury in 16 years, with investors preferring French paper even at rock-bottom returns.

“For Spain it’s a combination of the economic uncertainty and the bleak economic outlook. France has its problems as well, but they’re on a totally different scale than what we’re seeing in Spain and Italy,” said Ben May, an economist at Capital Economics.

The euro zone’s largest economy, Germany, sold bonds at a negative yield for the first time on Wednesday, and other highly-rated euro zone states have also found investors willing to pay to hold their debt as they emphasise capital preservation.

That has led others to seek returns in relatively higher-yielding French paper, but buyers continue to shun riskier sovereign borrowers such as Spain even at bumper yields.

Euro zone finance ministers are due to sign off on up to €100 billion of aid for Spain’s battered banking sector today, although economists are increasingly concerned Madrid may need a rescue package of its own.

Spanish borrowing costs jumped on all three bonds offered, with the longest-dated, a seven-year, coming in near the 7 per cent mark beyond which other euro zone countries have been forced to seek aid.

After the auction yields on 10-year Spanish debt trading in the secondary market climbed back above 7 per cent, with the spread versus German bunds, seen as the euro zone’s least risky asset, close to record highs at 582 basis points.

In total, Spain sold €3 billion of bonds – at the top end of its targeted range – although demand was softer than for previous auctions.

France, meanwhile, sold €8.96 billion of bonds maturing in 2015, 2016 and 2017, including €4.5 billion of five-year debt at a yield of 0.86 per cent.