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Spain sold 3.5 billion euros of bonds on Thursday, easing concerns it may face a Greek-style debt crisis, but it paid a hefty premium that raised fresh questions about how long it can meet refinancing payments.A day after the European Union and International Monetary Fund denied a report that said they and the U.S. Treasury were drawing up a safety net for Madrid, bids for the auction of 10- and 30-year paper totalled around twice the debt on offer.Spain was forced to pay investors 4.864 percent on the shorter-dated paper -- up from 4.045 percent at the previous sale a month ago and more than double the yield that France paid to sell five-year bonds on Thursday."When you compare it to where the (Spanish) bond traded two or three weeks ago this raises questions of sustainability ... in a medium-term context the jury still remains out," said Michael Leister, strategist at WestLB in Dusseldorf.The Spanish result still knocked safe-haven German bonds lower and sparked a relief rally in European stocks and the euro , hit by persistent speculation over a possible liquidity squeeze on Spanish banks.Bund futures dropped to four-week lows.An economy ministry source also said Spain's Treasury does not need to sell any more bonds to deal with 24 billion euro ($29.43 billion) of debt repayments in July."The strong demand for Spanish bonds should help restore confidence," said Ciaran O'Hagan, strategist at Societe Generale.TOP OF RANGEFrance sold nearly 8 billion euros of short-dated paper and 1.8 billion euros of inflation-protected bonds, with both countries managing to sell near the top of the amounts they had planned before the tenders.The Spain/Germany 10-year bond yield spread narrowed to 211 basis points from a euro lifetime high of 238 bps set earlier as the 10-year Spanish bond yield dropped to 4.8 percent from a high of 5.043 percent.Spain's 10-year bond yield spread against benchmark German Bunds had swelled to record highs on speculation the government might need European Union aid and its banks might be facing a liquidity freeze in international markets.RBS research showed Spanish banks' reliance on European Central Bank funding hit a record level in May at 105.6 billion euros, accounting for 13.4 percent of total ECB lending, up from an average of 7 percent between 1999 and 2007.Spain also paid a high price on the longer-dated paper, with the yield jumping to 5.908 percent from 4.758 percent on March 18.In contrast, the average yield for France's new five-year bond was 2.10 percent, just 10 basis points above the coupon.Still, the Spanish auction helped ease market tensions over Spain's ability to meet this year's remaining bond redemption of 16.2 billion euros by the end of July.A much-anticipated labour market reform passed by the Socialist government on Wednesday did little to raise confidence in the Spanish economy.(Reporting by Paul Day; Editing by Patrick Graham)
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