Madrid: Spain’s short-term borrowing costs dropped at auction on Tuesday as investors bet the European Central Bank (ECB) will intervene on bond markets, but a lack of detail over when and how it will act meant yields remained punishingly high.

The Treasury sold €4.5 billion (Dh20.6 billion) of 12- and 18-month T-bills, at the top of its target of between €3.5 billion and €4.5 billion, though demand was mixed. The yield on the shorter paper fell to 3.07 per cent from 3.92 per cent in July.

“The focus is very much on the ECB’s pledge of intervention, in combination with [Eurozone rescue fund] the EFSF. Markets appear to be giving the benefit of doubt to that money hitting the markets, but there’s a lot left to be revealed,” Deutsche Bank economist Mark Wall said.

The Treasury will not sell longer-dated debt until September 6, the same day the ECB is expected to detail its plans for addressing the Eurozone’s debt crisis, and German Chancellor Angela Merkel pays an official visit to Spanish Prime Minister Mariano Rajoy in Madrid.

Spain’s debt servicing costs remain uncomfortably high because investors are unnerved by uncertainties over whether Madrid will need to apply for a full sovereign bailout. That would stretch existing European Union (EU) funds and likely transfer much of the market pressure to the larger Italian economy.

Seeking bailout

Rajoy opened the door to applying for aid earlier in August, but said he needed to know the conditions first and more about the ECB’s plans to help deflate debt costs for Europe’s southern economies.

Yields on Spain’s two-year debt have fallen particularly sharply in the secondary market in the last few weeks on expectations the ECB will concentrate any debt purchases on shorter maturities.

On Tuesday, the premium investors demand to hold benchmark Spanish 10-year debt over its German equivalent fell to 476 basis points after the auction, down around 7 points on the day.

The bloc’s fourth largest economy saw financing costs soar to near euro-era highs last month on concerns it may take years to recover from a housing bubble that burst in 2008 and is too weak to digest massive public and private debts.

The country has already applied for a rescue of up to €100 billion to help capitalise its banks, battered by bad loans from the construction sector and consumer demand undermined by record high unemployment of almost 25 per cent.

On Tuesday, the Treasury sold €3.5 billion of the 12-month bills, at a bid-to-cover rate that fell to 1.9 after 2.2 last month.

It sold €982 million of the 18-month bill, which was four times subscribed compared with 3.7 times in July. The yield fell to 3.33 per cent from 4.24 per cent in July.