Spain fell short of its targeted amount at a triple bond auction on Wednesday, prompting a rise in yields on the secondary market as investors await the government's move to trigger European Central Bank bond-buying.
The Treasury sold 4.3 billion euros ($5.6 billion) of bonds compared to a target range of between 3.5 billion and 4.5 billion euros, including 1.1 billion of its 10-year benchmark.
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The 10-year yield fell to 5.290 percent from 5.458 at the last auction but offered little or no premium to the rate at which banks were trading the paper ahead of the auction - a sign of a weak result.
The Treasury also sold a bond maturing Oct. 31, 2015 at a lower yield than the previous auction while another due July 30, 2019, at a higher yield than at a previous auction of the same paper in January.
"A bit disappointing that they didn't manage to raise the full amount," said Nick Stamenkovic, strategist at RIA Capital Markets.
"The sheer scale of issuance next year and the lack of demand from domestic investors suggest to me that it's just a matter of time before Spain has to make an official bailout (request) but that's a story for early 2013," he said.
Yields in Spanish bonds have fallen from highs of more than 7 percent reached over the summer, easing the feeling of crisis in the euro zone thanks largely to an ECB bond buying plan that requires an official request for aid to swing into action.
In Madrid's broader battle to rebalance its economy and get its debt down, yields remain high for a country facing another year without economic growth.
Hit by an economic slump that has left one in four out of work as well as overspending by regional and central government, Spain is likely to overshoot its 2012 deficit target.
But the auction on Wednesday - the second to last of its bonds for 2012 - should mean it has covered all of its financial needs for this year. After covering redemptions, the Treasury has additional funds of almost 44 billion euros, according to government data.
Spain's risk premium over Germany rose to 400 basis points after the auction, up 10 basis points from before the auction but still below highs of over 650 bps hit in July.
"There's still a somewhat Teflon-like feel to Spain's bond market despite the fact that demand at today's auction - a fairly modestly sized one at that - was not as strong as expected," said Nicholas Spiro of Spiro Sovereign Strategy in London.
"Still, the lower yield on the 10-year note is a further illustration of the enduring signalling effect of the ECB's bond-buying programme. The very fact that Spain is, at least on paper, pre-funding for next year and selling 10-year paper at 5.3 percent is quite an achievement considering how dire things looked as recently as July."