Spain’s Treasury sold 2.4 billion euros ($3.2 billion) of bonds, less than its maximum target, as borrowing costs surged after Moody’s Investors Service said it may downgrade the country’s credit rating. The nation sold 1.78 billion euros of 10-year bonds at an average yield of 5.446 percent, compared with 4.615 percent last time the securities were issued on Nov. 18, the Bank of Spain said today in Madrid. It also sold 618.7 million euros of 15- year debt at 5.953 percent, compared with 4.541 percent when the paper was last sold on Oct. 21. The Treasury aimed to raise as much as 3 billion euros in the last sale of the year, less than the habitual target, after Finance Minister Elena Salgado said the nation would reduce issuance amid an increase in borrowing costs. The government is pre-funding for 2011 as this year’s needs have already been covered, Salgado said. Demand for Spanish 10-year bonds was 1.67 times the amount sold, compared with 1.84 at the last auction on Nov. 18, the Bank of Spain said. The bid-to-cover ratio for the 15-year bonds was 2.52 times, compared with 1.44 times at the October auction. Spain is trying to convince investors that the nation and its lenders will be able to meet their refinancing needs next year without having to follow Ireland into seeking a European bailout. After an increase in Spain’s extra borrowing costs to a euro-era high, Moody’s said yesterday it may cut the country’s Aa1 rating as public and private refinancing needs next year make it “susceptible to further episodes of funding stress.” Yield Spread The gap between Spanish and German 10-year bond yields was steady after the sale at 247 basis points. That compares with a euro-era intraday peak of 298 basis points on Nov. 30, and an average of 15 basis points in the first decade of monetary union. Spain, reeling from the collapse of a debt-fueled housing boom, has the highest unemployment rate in the euro region at more than 20 percent and the third-largest budget deficit, at 11 percent of gross domestic product last year. Socialist Prime Minister Jose Luis Rodriguez Zapatero is trying to restore investor confidence with measures that have eroded his support among voters to record lows. The ruling Socialists would win 24.3 percent of the vote if elections were held now compared with 43.1 percent for the People’s Party, according to a poll published on Dec. 5 by newspaper El Pais. Zapatero meets European counterparts today in Brussels, where they will discuss the creation of a permanent mechanism to support countries with financing difficulties from 2013. The temporary facility set up in May expires that year. Germany is hardening its opposition to expanding the facility, increasing discord between Chancellor Angela Merkel and ECB President Jean-Claude Trichet ahead of the summit amid concerns that the existing 750 billion-euro fund may not be big enough if more countries seek help. To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Paul Tobin in Madrid at ptobin@bloomberg.net. To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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