By Nigel Davies
MADRID (Reuters) - Spain paid sharply higher yields to sell 3.3 billion euros ($4.70 billion) of bonds on Thursday after a renewed market attack that has driven its costs of borrowing close to unsustainable levels.
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The Treasury sold 2.2 billion euros of a 2014 bond, and 1.1 billion euros of a 2015 bond, bringing the total sale close to the top end of the Treasury's 2.5-3.5 billion euro target range.
Spanish yields have soared to their highest level since the inception of the euro as a still-deepening debt crisis threatened to swallow the larger economies of Italy and Spain.
Average yields for both Spanish issues were the highest at a Treasury sale of such maturities since 2000.
Dealers said that demand had been helped by market talk the European Central Bank would re-start its bond buying program to aid the struggling peripheries.
"The fact they are short-dated bonds, and speculation the ECB will buy bonds again has seen aggressive buying by primary dealers," said an official from one major bank in London.
"The question is what happens now -- if the ECB does not buy bonds then there could be a big sell-off in the periphery."
He also said that Chinese accounts had been buying debt issued by the euro zone's highly-indebted periphery in recent weeks.
Zapatero delayed holidays this week to discuss ways out of the turmoil with ministers and will stay in Madrid on Thursday, his 51st birthday.
The average yield on the 2014 bond was 4.813 percent, up on the 4.037 percent the last time it was sold on June 2. The average yield on the 2015 bond was 4.984 percent. The bond was last sold in 2009.
The yields were both below the 5 percent mark, crossed on Wednesday on the secondary market.
The yield on the benchmark ten-year bond was around 6 percent on Thursday, close to euro-era record highs.
Analysts remain concerned government financing is unsustainable over a long period at these levels and should they rise above 7 percent would eventually force Spain to call for a bailout following Portugal and Ireland when they paid similar rates.
The bid-to-cover ratio on the 2014 bond was 2.1, compared with 2.5 in June. The 2015 bond was 2.4 times subscribed.
"There's strong underlying demand for Spanish paper given the high bid/covers. But the main driver for this decent demand was this concession and also probably domestic support and institutional support," said Michael Leister, strategist at WestLB.
(Reporting by Nigel Davies; Additional reporting by London government bonds desk; editing by Patrick Graham)