Spanish borrowing costs mostly fell at a bond auction on Thursday but uncertainty over whether the government will ask for an international bailout means they could rise again soon.
The Treasury managed to meet the top end of its 3 billion to 4 billion euro target for the auction, showing investors still have appetite for the country's debt in the belief a rescue package will come soon.
The yield on the 2014 bond was 3.282% after 5.204% when it was last sold on July 19. The 2017 bond sold at an average yield of 4.766%, compared with 6.459% the last time it was sold on the same date in July.
The 2015 bond yield edged up to 3.956%, however, compared with 3.845% when it was last sold on September 20, indicating lingering concern over when Spain would ask for help.
Spain is at the sharp end of the euro zone debt crisis as it weighs applying for an aid package that would pave the way for the European Central Bank to buy its bonds.
In contrast France easily sold close to 8 billion euros of bonds on Thursday.
Spain's debt yields soared over the summer and then fell sharply in August after the ECB announced a bond-buying programme designed to bring down Spain's financing costs and those of other struggling euro zone states.
That kept things in check at bond auctions on Thursday.
"There is a natural demand given the expectation that at some point Spain will request a sovereign bailout and the ECB ... will buy short-dated bonds," said Nick Stamenkovic, bond strategist at Ria Capital Markets.
Two of the bonds sold would come under the ECB's bond buying programme. But demand was decent for all of the bonds sold, including the five-year bond, and increased from their last sales.
On the secondary market, the spread between Spain's benchmark 10-year bond and the German benchmark, which measures the perceived risk of investing in Spain, widened by 10 basis points to 446 basis points compared with Wednesday's close.
On Tuesday, Prime Minister Mariano Rajoy said a European bailout package was not imminent, following a Reuters report that said Spain was ready to call for aid but that Germany was urging the country to wait.
On Thursday former ECB board member Jose Manuel Gonzalez-Paramo became the latest public figure to back Spain calling for a rescue package using the "ECB's umbrella" to help the country until reform work helped the economy pick up again.
The ECB holds a policy meeting later that, for the first time in months, will focus on interest rates and whether they can be reduced to support the region's recession-bound economy.
INTERNATIONAL INVESTORS STAY AWAY
The auction puts the country's planned issuance for the year further ahead of schedule, having now issued around 86% of medium and long-term bonds it envisaged.
But the largely successful auctions mask the fact that the Treasury is dependent on domestic banks to sell its debt, a worrying trend according to analysts as the European Union wants to break the union between governments and banks.
Data released this week by the Treasury showed that for the first time since 1995 domestic banks owned more Spanish debt in August, at 36%, than foreign investors, at 34 percent. The rest is held by public bodies and pension funds, among others.
The data clearly spell out how international investors have dumped Spanish bonds this year, and many say no change will be seen until the country calls for a rescue.
"Markets are giving Spain the benefit of the doubt in anticipation of a rescue. Foreign investors need to see some sort of conditional backstop in place before seriously thinking about buying Spanish debt again," said Sassan Ghahramani, head of New York-based hedge fund consultancy SGH Macro.
Foreign Investors will also keep their guard up before ratings agency finally publishes its rating review of Spain this month, delayed from September while it considers the impact of the country's budget and efforts to recapitalise the banking system.
