Investors today bought all €3 billion of 15-year bonds offered by Spain, with demand strong enough to ease concern the nation would struggle to cover debt payments after Greece's bailout.
"The Spanish auction went well," said Chiara Cremonesi, a strategist at UniCredit Research in London. "Appetite for Spanish paper is alive."
Spain, which has to repay €24.7 billion of debt this month, has the third-largest deficit in the euro region and its banks are dependent on the European Central Bank for funds.
Prime minister Jose Luis Rodriquez Zapatero risks losing power as he pushes through austerity measures including cutting workers' hours, freezing pensions and reducing severance pay.
Today's auction raised the maximum offered at an average yield of 5.116 per cent, compared with 4.434 per cent at a sale of the same securities on April 22nd, the Bank of Spain said.
Demand was 2.57 times the amount sold, compared with the bid-to-cover ratio of 1.79 in April. Spanish bonds rose and the euro strengthened. The government is hoping the publication of stress tests next week will allow its financial institutions to access capital markets.
Spanish lenders borrowed a record €126.3 billion from the ECB in June, up 48 per cent from the previous month, according to data compiled by the Bank of Spain.
That compares with a drop of 4 per cent to €496.6 billion for euro-area lenders as a whole.
The yield premium investors demand to hold Spain's 10-year debt over comparable German bonds fell to 199.6 basis points after the auction, from 211 basis points earlier.
The euro gained 0.4 percent to 1.2792 against the dollar. "People who expected the end of the world in July because of the redemptions have been proved wrong," said Gianluca Salford, a fixed-income strategist at JPMorgan Chase in London.
Spain's auction follows Greece's sale of Treasury bills on July 13th, its first since the country accepted a three-year bailout plan from the European Union in May after its borrowing costs surged.
Greece secured an interest rate at that sale below the 5 percent charged on the emergency European loans. Portugal sold more debt than targeted in an auction yesterday, a day after Moody's Investors Service cut the country's credit rating, and Italy also sold €6.8 billion of bonds yesterday.
The Spanish government has said it will have no trouble paying the July redemptions, particularly as repayment coincides with a period of increased tax revenue.
"The markets know perfectly well that we have been executing our funding strategy beyond our needs with no particular concern," deputy finance minister Jose Manuel Campa said.
Bloomberg