Spain was forced to pay a hefty premium at its final bond auction of the year on Thursday, in a key test of investor appetite for euro zone peripheral debt a day after Moody's said it may cut the country's rating.
The Spanish Treasury raised 2.4 billion euros ($3.20 billion), within the targeted range of 2-3 billion euros but disappointing some analyst who expected more debt to be sold.
Average yields on the two issues rose between 80 and 140 basis points from previous auctions of the same maturities.
That was a touch lower than what was expected according to trade in the secondary market ahead of the auction but analysts said the price paid by the Spanish government showed it remained at real risk of having to seek outside help next year.
"In the short term this should reduce pressure on the Spanish market, but I think when one looks at the bigger picture and considers the small amount sold, with low bid-covers, yet at a high yield, then it seems clear that peripheral markets remain under pressure and in need of support from policymakers," said Peter Chatwell, rate strategist at Credit Agricole in London.
The auction came as European leaders head to a summit in Brussels to decide their response to the euro zone debt crisis, which has pushed up borrowing costs for Spain and other countries on the euro periphery.
"This is a bit disappointing on the size versus the maximum amount the Treasury wanted to issue," Nick Matthews, economist at RBS, said.
"The yield is well above the previous auctions and that's really indicative of the challenges that were out there and was expected considering what's happened."
Spain, the fourth largest economy in the euro zone, is under intense scrutiny from international markets which are betting on whether it will be forced to apply for a European Union bailout after Ireland was given 85 billion euros in November.
Moody's, which currently rates Spain's sovereign debt at one notch below top at Aa1, said it could not rule out that Spain would go to the European Financial Stability Facility (EFSF) but that it was not its base scenario.
Merrill Lynch said Spain has a more than 60 percent chance of asking for EFSF funds next year as a sovereign and banking financing crunch threatens.
"Once the stigma is removed from applying to the fund, it makes sense for Spain. This isn't a solvency issue but as markets push spreads higher, they could finance from the fund and come out much stronger in 18-months," economist at Merrill Lynch Guillaume Menuet said.
Spanish 10-year bond yields were trading around 5.53 percent at 11.30am CET. Some economists view a yield of 6.5 percent on benchmark 10-year Spanish bonds as the tipping point that would push the country into an unsustainable financing cycle.
© 2017 Thomson/Reuters. All rights reserved.