Spain received strong bids for its three-, five- and nine-year bonds and raised 3.88 billion euros. Having already met its 2012 funding target, the proceeds of Thursday's sale kicked off its 2013 campaign -- a quest Madrid is likely to find difficult to complete without outside help.
Markets expect Spain will eventually request aid, enabling the ECB to buy its short-term bonds.
"It's a clear reflection that sentiment in Spain has improved markedly," RIA Capital Markets bond strategist Nick Stamenkovic said.
"They are already funded for 2012 and the market is betting that Spain will ask for a bailout early next year when they face a (wall of issuance). On top of that markets seem pretty sanguine about Greece and they think somehow, by hook or by crook ... they're going to get their money."
German Chancellor Angela Merkel said on Wednesday an agreement to release aid to Athens was possible next Monday when euro ministers meet on Monday. Greece's international lenders failed to reach a deal earlier this week.
Ten-year Spanish yields were 7 basis points lower on the day at 5.66 percent, having traded above 6 percent at the start of the week.
Expectations that Greece will soon get more cash set Greek yields on course for their 10th consecutive daily fall. The February 2023 bond yield dropped to 16.164 percent, its lowest since it was issued as part of a debt restructuring in March.
Rabobank rate strategist Lyn Graham-Taylor said the market was also betting Greece might secure easier bailout terms, such as lower interest rates or the inclusion of debt buybacks funded by the euro zone rescue fund.
Euro zone paymaster Germany has said such options could bridge the funding gap over which the deal foundered on Wednesday.
"If that happened, it could be positive for Irish and Portuguese yields as well," Graham-Taylor said.
GAINING MOMENTUM
Merrion Stockbrokers chief economist Alan McQuaid said Merkel's comments would lead to further gains for fringe euro zone bonds in the near term and said his firm would be buying such paper and selling higher-rated bonds in the coming days.
He expected Spain to ask for help possibly as early as next week once elections in the wealthy Catalonia region over the weekend are out of the way.
"I expect Greece will get a deal next Monday given Merkel's comments and ... Spain might start looking for a bailout next week," McQuaid said, adding that a post-bailout rally could "easily" take 10-year Spanish yields below 5 percent.
German Bund futures were five ticks lower at 142.12, having fallen 83 ticks in the previous two sessions. Charts pointed to further losses for Bunds in the near future as they broke below their 100-day moving average at 142.34.
UBS technical analyst Richard Adcock recommended investors bet on a fall towards 141.50, just above the mid-point of the October-November rise.
German 10-year yields were a tad higher at 1.438 percent, with Commerzbank strategists expecting them to rise towards 1.50 percent in coming days.