Spain sees strong demand for short-term bonds

MADRID: Spain saw strong demand for short-term bonds at an auction on Tuesday, suggesting markets remain confident over the country's ability to cut a ballooning fiscal gap.

The treasury said it raised a total of 2.87 billion euros ($3.89 billion) in three-month and six-month bonds, within the target range of 2.5 to 3.5 billion euros. Demand totalled 11.79 billion euros.

The average yield, or rate of return for investors, was 1.101 percent for the three-month bonds, up slightly from 0.980 percent at the last similar auction on January 25 but less than the rate at Monday's close of 1.175 percent.

For the six-month bills, the rate was 1.588 percent, down from the 1.801 percent previously and from 1.650 percent at Monday's close.

"Overall the result of the auction looks fine and this should reassure investors a bit after weaker-than-expected demand at the last week Spanish bond auction," UniCredit strategist Chiara Cremonesi told Dow Jones newswires.

The good result of the auction comes after the government on Friday approved tough new rules that require the country's troubled savings banks to boost their core capital in a bid to shore up confidence in its battered economy.

Finance Minister Elena Salgado said the plan would "strengthen the solvency and credibility of our financial sector" and make it "easier to obtain financing."

Concerns that Spain could be forced to seek a rescue by the European Union and International Monetary Fund as Ireland and Greece pushed the country's bond rates sharply higher last year, adding to the costs of servicing Madrid's sovereign debt.

Those fears appear to have eased since then as Madrid has strengthened bank balance sheets, cut spending and pursued economic reforms.

Prime Minister Jose Luis Rodriguez Zapatero has said his government narrowly beat its 2010 public deficit target of 9.3 percent of gross domestic product.

He has vowed to bring the public deficit down to 6.0 percent this year and to within the EU limit of 3.0 percent in 2013.

Spain's public deficit hit 11.1 percent of GDP in 2009, the third-highest in the eurozone after Greece and Ireland.