Spain's 5-yr bond sale seen backed by local banks

Spain's auction of a five-year bond will likely meet strong demand on Thursday but yields may well inch higher as fears persist over euro zone periphery debt.

The Treasury said on Monday it will look to raise 2.5-3.5 billion euros from the auction, and is expected to do so easily with Spanish banks strong buyers of the country's debt.

"Domestic banks are still playing a major support role for auctions and it's much too early to be seeing auctions going badly," said a bond trader at a major euro zone bank.

He said the auction would be helped by its relatively small size, though cautioned that much could happen between now and Thursday in turbulent markets.

Yields will likely have climbed since the bond was last issued May 6 as the spread between Spanish government ten year debt and German benchmark bunds rose close to 200 basis points on Monday, not far from a record high of 238 bps.

Last time out the bond saw an average yield of 3.532 percent and met with solid demand with a bid-to-cover ratio of 2.35.

The same trader forecast the bond to yield 3.5-3.7 percent on Thursday, with the bond currently trading around 3.7 percent.

The yield was some way higher than the 2.8 percent seen in March before financing costs spiralled as investors pummelled euro zone periphery debt. In May, 2.35 billion euros of the paper was sold, meeting the Treasury's target of 2-3 billion euros.