Investors show healthy appetite for Spanish bonds

Investors showed a healthy appetite for Spanish debt Thursday but demanded a higher borrowing rate in an auction that was a key test of confidence in the government's ability to get a handle on its debts.

The Treasury auctioned €2.54 billion ($3.33 billion) in two- and 10-year bonds at the top end of targeted demand. It had set a range of €1.5 billion to €2.5 billion for the sale.

The interest rate, or yield, on the 10-year bond was 5.7 percent, up from 5.3 at the last auction on April 4. Demand was more than double the amount sold, down from about triple at the last auction. On the shorter-term notes, the bid to cover ratio was 3.3 this time while the average yield was 3.5 percent. The Treasury did not provide a comparison figure for this maturity.

Over the past couple of weeks, Spain has become the epicenter in Europe's debt crisis, with investors becoming increasingly concerned over whether the new conservative government could push through its austerity and reform program at a time of recession and sky-high unemployment.

Earlier this week, the yield on Spain's 10-year bonds on the secondary market, where they are traded like shares, spiked above 6 percent, toward the levels that forced Greece, Ireland and Portugal, into seeking outside financial help.

The problem for the other 16 countries that use the euro, however, is that Spain's economy is about double the size of the three bailed-out countries, meaning that it will cost much more to bail out.

"Markets are becoming increasingly worried that, in the absence of a much bigger firewall than the one which is currently available, Spain will find itself in a similar situation to Greece, only without the luxury of a bailout to fall back on," said Michael Hewson, senior market analyst at CMC Markets.

Markets across Europe had been cautiously upbeat ahead of the bond auction, partly because the amount Spain is trying to raise is not huge. The Stoxx 50 index of leading European shares up 0.6 percent and Spain's ten-year yield was down a further 0.03 percentage point to 5.78 percent. After the auction, it rose to 5.81 percent, according to market data provider FactSet.