Spain scandal, weak economy push up yields at triple auction

Political uncertainty over a corruption scandal and revived concerns over the economic health of the euro zone forced the Spanish Treasury to pay more to borrow at a triple-bond auction on Thursday.

Demand was strong, however, and yields remained well away from crisis levels.

Spain sold 1.948 billion euros ($2.6 billion) in a 2015 bond, with the yield rising to 2.823 percent, up from 2.476 percent at the last sale of that paper, in January. Yields also rose on a 2018 bond and a 2029 bond that were sold at the auction.

In all, it sold 4.6 billion euros worth of the three bonds, slightly higher than the top end of its target range. Demand was strong, continuing the trend from January when Spain saw yields on shorter-term paper falling to ten-month lows.

It means that Spain had now sold over 18 percent of its full-year medium- and long-term funding target.

"All things considered, the Treasury will be pleased it managed to get all its debt out the door at an increasingly sensitive time for Spain," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

"However, the result of today's auction reflects the recent shift in sentiment towards Spain: a marked increase in yields after months of declines."

Yields have jumped back up to mid-December levels in Spain and elsewhere in Europe, as an economic downturn spreads around the entire euro zone.

Investors are also eyeing potential political instability in Spain due to a widening corruption scandal involving officials of the ruling People's Party, or PP.

Prime Minister Mariano Rajoy has denied any wrongdoing in a graft scandal. A former PP treasurer, Luis Barcenas, appeared on Wednesday for questioning by prosecutors who are looking into reports that he ran a slush fund that allegedly channeling business contributions to party leaders. Barcenas has denied the accusations in the press.

(Additional reporting by William James in London; Editing by Fiona Ortiz/Jeremy Gaunt)