Spain saw strong demand for its bonds on Thursday but had to pay high levels of interest that may prove unsustainable over time, highlighting concerns about peripheral euro zone debt.
Spain sold 1.50 billion euros of a 2014 bond and 1.50 billion euros of a 2016 bond at a tender, hitting the top end of the Treasury's 2-3 billion euro target range. Bids of close to 8 billion euros were received.
But the market demanded a high premium for the debt after ratings agency Moody's cut Portuguese debt to junk status on Tuesday, while doubts still abound over the EU's ability to solve the debt crisis and for countries to meet fiscal targets.
"It is a vote of confidence even if everyone is talking about domestic support here. The underlying concerns continue to bubble away and Spain remains very much in the firing line," said Jo Tomkins, analyst at consultancy 4Cast.
She said that once a solution was found to Greece's second bailout package attention would then turn to Portugal and Ireland, and Spain could get caught up too.
Analysts pointed to strong support from domestic banks in the sale, though a source close to the Treasury said international investors had bought over 65 percent of the bonds.
Spreads on bonds from the euro zone's most indebted states against Bunds were unchanged immediately after the results, although bonds were generally lower on Thursday.
Spain's key risk premium on ten-year bonos remained close to record highs around 276 basis points.
The average yield on the 2014 bond was 4.291 percent. It was last auctioned as a five-year bond in January 2010.
The average yield on the 2016 bond was 4.871 percent, up on the 4.549 percent the last time it was sold on May 5.
Separately, France sold 8.4 billion euros of three long-dated bonds, which analysts said were well received, and continued to reflect a marked distinction between debt from countries at the 'core' of the euro zone compared with the periphery.
YIELDS SEEN UNSUSTAINABLE
The Spanish bonds were well bid, with the bid-to-cover ratio on the 2014 bond at 2.3. The 2016 was 2.9 times subscribed, compared with 1.9 times in May.
Despite that analysts said Spain could only afford to go on paying these prices for so long.
"Obviously the yields are that much higher than last time and in the long run, with the amount of debt Spain has to sell, this creeping cost of issuance is not a good thing," said Marc Ostwald, strategist at Monument Securities.
The Treasury has now issued 52.4 billion euros, or 55.9 percent of its planned medium and long-term debt issuance for the year.
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