Spanish Bond Auction Flags Appetite for Peripheral Debt

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Spain's borrowing costs fell after a successful bond auction on Thursday, with the yield for its benchmark 10-year bond at its lowest in three years.

The Spanish Treasury beat the top end of its target range for the auction, selling 4.7 billion euros ($6.1 billion) of three-year, five-year and 10-year debt, rather than the planned 3.5-4.5 billion euros.

Borrowing costs fell across all three maturities, with the 1.3 billion euros ($1.7 billion) of benchmark 10-year bonds yielding an average of 4.61 percent, down from 4.89 percent in March's auction.

Appetite for lower-rated paper has increased at recent sovereign debt auctions, as expectations of further monetary easing measures spur investors to seek higher yields.

Earlier this week, Italy's borrowing costs fell after a forecast-beating sale of 17 billion euros of inflation-linked bonds, while Slovenia averted an impending funding crisis on Wednesday when it sold more than twice the amount of government bonds it had initially hoped.

(Read More: Italy Raises Funding Target by 10% on Asian Demand )

"Peripheral euro zone debt markets remain remarkably resilient. As the 'hunt for yield' continues unabated, Spanish and Italian bonds have been in something of a sweet spot for several months, benefiting from the higher carry trade, the perceived credibility of the European Central Bank backstop and, most recently,the sentiment-boosting policy actions of the Bank of Japan," Nicholas Spiro,managing director of Spiro Sovereign Strategy, said.

Investors' appetite for peripheral debt flies in the face of ongoing fears about contagion from Cyprus, where the contentious bailout deal risks rejection by the country's parliament when it is put to the vote.

(Read More: Cyprus Bailout in Danger as Opposition Grows )

Spiro added that markets were also underestimating risks specific to Spain.

"Most investors are choosing to downplay idiosyncratic risks in Spain, of which there are too many to list, and treat the market as a high-return, as opposed to ahigh-risk, one. Today's well-received auction, with a further drop in yields and robust demand, underscores the extent to which peripheral euro zone debt markets are almost immune from growing concerns about economic growth," he said.

(Read more: There is no Silver Bullet for Debt Concerns)

By CNBC's Shai Ahmed: Follow her on Twitter @shaicnbc