MADRID — Spain’s funding costs climbed at a bond auction on Thursday after a corruption scandal amongst its political elite and concerns over its weak economy tempered investor enthusiasm for the country’s debt.

The costs remained far from crisis levels, however, and demand was solid.

The Treasury paid almost half a percentage point more for its shorter-dated debt at a triple bond sale from just four weeks ago. At around 2.8%, however, two-year yields were a shadow of last summer’s euro-era highs above 7%.

The auction also means Spain had sold over 18% of its full-year medium-and long-term funding target.

"The result of today’s (Thursday’s) auction reflects the recent shift in sentiment towards Spain — a marked increase in yields after months of declines," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

He said, however, that Spain should be pleased by the results, given the current economic and political problems.

Yields have jumped back up to mid-December levels in Spain and elsewhere in Europe, as an economic downturn spreads around the entire eurozone and recovery outside the region is boosting demand for high-yielding assets.

France’s long-term bond yields also rose in their latest debt sale on Thursday, for example.

Spain, however, is also being scrutinised by investors for potential political instability because of a widening corruption scandal involving officials of the ruling People’s Party.

A former party treasurer, Luis Barcenas, has described as fakes handwritten ledgers published last week by El Pais newspaper, which accused the party of channelling payments through secret accounts from managers of building companies to its leaders, including Prime Minister Mariano Rajoy.

Mr Rajoy has adenied any wrongdoing, while Mr Barcenas appeared on Wednesday for questioning by prosecutors, who are looking into reports.

Economic concerns

A pledge by European Central Bank to buy debt of struggling eurozone states has helped create a firewall against a sell-off of Spanish paper but with the economy in a deep recession and growing concerns over its finances, it may see debt costs rise again.

The country has been at the centre of the eurozone debt crisis as it fights to deflate one of the highest budget deficits in the bloc through wide-reaching austerity measures, which many claim could make economic recovery harder.

The government is expected to announce a public deficit of around 7% of gross domestic product in 2012 in the next few weeks, down from over 9% a year earlier.

Many, however, fear such a sharp reduction implies unprecedented budget cutting efforts that will be near impossible to continue.

Spain’s budget plan faces strong headwinds from rising costs of 26% unemployment, an ageing population and high debt funding bills.

On Thursday, Spain sold €1.948bn in a 2015 bond, with the yield rising to 2.823%, up from 2.476% 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, Spain sold €4.6bn 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.