MADRID — SPAIN sold nearly €4bn of bonds with ease at an auction on Thursday that kicked off its funding programme for a daunting 2013 when Madrid must shoulder regional debt needs and will struggle to meet deficit targets.

The Treasury beat the top end of the target of €2.5bn to €3.5bn at borrowing costs that were slightly down on previous outings of the same paper but remain too high for comfort.

The average yield on the 2021 bond was 5.517%, compared with around 5.6% for the benchmark 10-year on the secondary market, a long way from over 7% levels in July.

"It’s a clear reflection that sentiment in Spain has improved markedly," said bond strategist at RIA Capital Markets Nick Stamenkovic.

"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)," he said.

Madrid faces some €28bn in debt redemptions in January while in 2013 the country’s funding needs rise to €207bn from €186bn this year.

This could go higher still if it overshoots its deficit target of 6.3% this year and 4.5% next year, which the Bank of Spain warned on Wednesday was possible.

Spain sold €3.6bn of a bond maturing October 31, 2015, €645m of a bond due July 30, 2017 and €1.5bn of paper maturing April 30, 2021.

Concerned that the welfare system could slip into deficit this year, from a balanced budget target, the economy ministry said separately that the social security reserve fund will subscribe a new €3.3bn five-year sovereign bond.

Madrid is also expected to help struggling regional governments, cut out of debt markets, which could add a further €40bn to its debt bill.

Spain’s economy has been in recession for a year, the second since 2009, and is not expected to return to growth until late next year at the earliest. Some 25% of Spanish workers are unemployed and deep spending cuts and tax hikes have fuelled increasingly violent protests across the country.

However, Spain’s risk premium versus Germany has fell to around 423 basis points from above 650 basis points (bps) since the European Central Bank (ECB) said it would buy up debt on the open market to hold down interest rates for any country that signs up for aid.

Madrid has said it wants to be sure the ECB measure would reduce financing costs, citing a spread of 200 bps as more representative of economic fundamentals, though the central bank’s head, Mario Draghi, said he could not make such a promise.