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Spain paid euro-era record high rates to sell two long-term bonds on Thursday before European leaders meet to try and put a line under a debt crisis that threatens to tear into the bloc's larger periphery countries.
Spain sold 1.8 billion euros of a 10-year bond, and 814 million euros of a 15-year bond, at the top of a low Treasury target of 1.75 billion to 2.75 billion euros.
But fears that Spain could be next to sink into a debt crisis that has already seen pushed three euro zone countries into bailouts forced the Treasury to pay hefty yields to investors.
European leaders will meet later to agree on a second rescue package for Greece and also other measures aimed at stopping the rot spreading further.
"In the long run, these are pretty punitive funding levels for Spain," said Marc Ostwald, strategist at Monument Securities, who said the auctions had at least gone reasonably well.
Rates at the auction came in lower than had been expected earlier this week after yields on the secondary market fell on Wednesday in anticipation that euro zone leaders may be able to cobble together a Greek rescue package to alleviate market concerns.
The average yield on the ten-year bond was 5.896%, up from 5.395% at the last sale on May 19. The yield was 6.191% on the 15-year issue, up from 6.027% at the last auction on June 16. Both were the highest levels for those maturities at auctions since 1997, before the creation of the euro.
Analysts warn that such rates will not be sustainable for Spain over a long period, and one said if the rate on the 10-year bond went much higher it would spell trouble.
"If it gets closer to 7% things can turn very ugly," said a director at a major bank with links to the Treasury.
Separately, France sold close to 8 billion euros in short-dated bonds that analysts said were well received by the market.
"Good French auctions as expected," said Peter Chatwell, rate strategist at Credit Agricole, London. "Well covered as normal, with demand for the 5-year looking particularly good. Demand for non-German core paper remains solid, on this evidence."
On Thursday Spain's key debt risk premium as measured by the yield spread between its 10-year bonds and those of Germany was around 320 basis points, down from record highs close to 400 bps hit earlier this week.
Both bonds saw reasonable demand in tough market conditions, with the 10-year bond having a bid-to-cover ratio of 1.9 compared with 1.8 last time, and the 15-year bond was 2.1 times subscribed after 2.6 at its last auction.