A sale of 10-year bonds could test investor confidence at a time when the country's borrowing costs are nearing unsustainable levels, as market players worry about the country's ability to recapitalize its banking system without running out of funds.
But analysts said Spain should be successful in raising the $1.25-2.5 billion, to be split between three bonds including some with short maturities, largely because of the low target that was set for the auction. The recent improvement in risk sentiment on hopes of central bank stimulus and of a European policy response to Spain's banking problems also provided a more favorable backdrop, KBC strategist Piet Lammens said.
"The auction size is quite small, in this context I think the auction will go OK," he said.
The German Bund future was last down 14 ticks on the day at 144.52. It extended losses made in the previous session, when investors clung to hopes of more monetary easing, even after European Central Bank President Mario Draghi put the onus of a crisis resolution firmly on governments.
Concerns over Spain's overleveraged banking system and Greece's uncertain future in the euro took the Bund to record highs last week of 146.89.
Federal Reserve Chairman Ben Bernanke testifies on the economic outlook later in the session and investors will also scour his comments for any clues on further monetary easing after data last week showed the unemployment rate rising for the first time in nearly a year.
Fed Vice Chair Janet Yellen on Wednesday laid out the case for the US central bank to provide more support to a fragile economy as financial turmoil in Europe mounts.