MADRID Spain's borrowing costs dropped sharply at a debt auction on Thursday from previous sales, although any relief may be brief if the European Central Bank fails to unveil a significant bond-buying plan to prop up the euro zone's struggling economies.
Spain sold 3.5 billion euros ($4.4 billion) of bonds maturing in 2014, 2015 and 2016, raising the top end of a targeted range of between 2.5 billion and 3.5 billion.
The drop in yields reflected investors' hopes that ECB President Mario Draghi will give enough details of a conditional plan for buying Spanish and Italian government bonds to back up his promise on July 26 to do "whatever it takes" to preserve the euro.
Yields fell by up to almost two percentage points at the auction. Draghi is due to speak at 8:30 a.m. EDT (1230 GMT) after the ECB Governing Council's monthly policy meeting.
"Sentiment-wise, this was not so much a Spanish debt auction as a preliminary verdict on the ECB's soon-to-be-unveiled bond-buying plan," managing director of Spiro Sovereign Strategy Nicholas Spiro said.
"The positive result of today's auction, with the full amount sold and a sharp fall in the yields on all three maturities, has very little to do with what's going on in Spain. This is the 'Draghi effect' at work."
The euro zone's fourth largest economy is on the front line of the debt crisis due to concerns that it cannot finance itself at recent high levels for long, and will be forced to apply for a sovereign bailout which would stretch existing European funds to breaking point.
Prime Minister Mariano Rajoy, who came to power in December, has said he will not apply for aid until the ECB lays out its plans to lower debt costs for peripheral euro zone members and the conditions on any bailout are outlined.
Rajoy has already proposed spending cuts and tax increases worth around 10 percent of gross domestic product to the end of 2014. As social protests heat up, he will be reluctant to accept terms which demand further austerity measures.
On the secondary bond market, the premium investors demand to hold Spanish debt over its German equivalent debt was 20 basis points down on the day at around 483 bps, although it rose by 5 bps straight after the auction.
"After (the ECB announcement) everyone will have forgotten the Spanish auction and will be looking forward to the next one," said Ioannis Sokos, interest rate strategist at BNP Paribas.
Rajoy is expected to discuss the timing and conditions for an aid application when German Chancellor Angela Merkel visits Madrid on Thursday, a week after he met French President Francois Hollande, who nudged him toward seeking a bailout.
Spain has already been promised up to 100 billion euros in European bailout funds for its banks, battered by the collapse of a housing boom in 2008 and rising bad debts as the economy shrinks and unemployment soars to record highs.
The Treasury has sold over 76 percent of its 2012 gross issuance target of medium- and long-term debt, though a relaxed deficit goal and the cost of raising cash for its regions, cut out of markets, will add to financing pressures this year.
Draghi's comments on Monday that purchases of short-term sovereign bonds would not break EU rules have added to expectations the ECB would concentrate on debt maturities of up to three years, and this helped to ease pressure on that paper.
Spain sold 682 million euros of bonds maturing in 2014 at an average yield of 2.798 percent, down from 4.706 percent when they were last sold at an auction in June. The sale was two times subscribed after being four times subscribed previously.
The 2015 bond yielded 3.676 percent, down from 5.086 percent at its last auction in July. The Treasury sold 1.4 billion euros of the paper while bids were 1.8 times more than this, compared with 2.3 times at the last auction.
The longer-dated bond sold at an average yield of 4.603 percent compared with 5.971 percent last month. Traders bought 1.4 billion euros of the 2016 bond, at a bid-to-cover ratio of 1.9 after 2.7 previously.
(Reporting by Paul Day; Editing by Fiona Ortiz and David Stamp)