Spain scraped through a key test on the financial markets Thursday but failed to quash doubts over its future finances, analysts said after a treasury bond sale just beat money-raising targets.
Investors had been nervously waiting for the government bond auction, fearing a flop could unleash new attacks on Spain's sovereign debt and reignite the flames of the eurozone debt crisis.
Overall, the Treasury raised 2.54 billion euros ($3.3 billion) in an issue of two- and 10-year bonds, beating its own target of 1.5-2.5 billion euros, a Bank of Spain statement said.
The benchmark 10-year bonds sold at a return of 5.743 percent, up sharply from 5.403 percent at the previous comparable auction on January 19.
The rate for the 10-year issue was not as high as some had feared, however, keeping below the psychologically important 6.0-percent level, and demand outstripped supply by more than two-to-one.
Spain even managed to pay a lower rate in the auction of two-year bonds, for which the yield eased to 3.463 percent from 3.495 percent at the previous comparable issue on October 6, 2011.
Rates above 6.0 percent are generally held to be unsustainable over the longer term and the already issued 10-year bond just edged over that level briefly in recent trade as investors fretted that Spain might yet need a bailout.
Madrid's stockmarket fell sharply again Thursday, with the main IBEX-35 stock index falling below 7,000 points for the first time in three years after the auction. It closed 2.42 percent lower at 6,908.1 points.
The European Central Bank has helped to lower yields -- the rate of return earned by holders -- on Spanish and other fragile eurozone bonds by flooding banks with more than 1.0 trillion euros in cheap loans, which in turn flowed into the bond markets.
Spain's Treasury, which has already raised about half of its 2012 financing requirements, had lowered the target for this issue, said Daniel Pingarron, analyst at Spanish brokerage IG Markets.
"To me it seemed very good, the yield went up but by less than was expected. Also, we saw strong demand again as much for the two years as the 10 years," he added.
Overall, Spain's bond auctions were performing better than those of troubled eurozone partner Italy, Pingarron said.
"These tensions are not going to calm in the short term or even the medium term. They are tensions that in our view are a bit unfair and fairly exaggerated," he added.
"Spain has replaced Greece in the international, and especially the Anglo-Saxon press, as the country that has most problems. The problems are clearly enormous but reforms are being made."
International investors appeared to be fleeing Spain's sovereign debt, said a report by German-based private Berenberg Bank.
"Spanish banks, fuelled by cheap ECB liquidity, stepped into the breach but if they became more reluctant to bid in future auctions, Spain could be forced to ask for help from its European partners," it warned.
Spain posted a public deficit -- the shortfall of revenue compared to spending -- of 8.51 percent of gross domestic product in 2011, missing its 6.0-percent target by a wide margin.
Prime Minister Mariano Rajoy's conservative government, which took power in December, has promised to cut the deficit to 5.3 percent of GDP in 2012 and 3.0 percent in 2013.
Some in the markets have shown concern, however, that the focus on austerity could drive the economy even deeper into recession, making a debt rescue more likely.
"Despite the successful auction, we are long way from resolving anything," warned Javier Casal, deputy head of the public debt trading desk at Ahorro Corporation.
"The problem Spain has is serious, it is not a solvency problem but a liquidity problem -- now the Spanish banks need money."