Spain sold 3-month bills at the lowest yield on record at an auction on Tuesday as investors snatch up relatively high-paying instruments in expectation of a European Central Bank rate cut to counteract euro zone recession.
Spain's borrowing costs have dropped steadily since last summer, when the country seemed to be heading into a financial crisis that could trigger an international rescue, despite a stubborn recession and scarce bank credit for businesses.
The Treasury sold 3 billion euros ($3.9 billion) of 3-month and 9-month paper, at the top end of its target.
The 3-month paper sold 855 million euros at an average yield of 0.120 percent, the lowest since the Treasury introduced the paper in 1991, at a bid-to-cover ratio of 3.8 after 3.3 last month.
The Treasury sold 2.2 billion euros of the 9-month bill, introduced in February, at a yield of 0.787 percent, down from 1.007 percent in March. The paper was 2.4 times subscribed, unchanged from last month.
"There's increased risk appetite coming off the Italian Presidential election, everything's looking more positive," said Bhavisha Patel, fixed-income strategist at London-based consultant 4Cast.
"It looks like it's the market driving the yields, rather than the economy and it's because (of hopes) the ECB will do something and save the day. It's not pricing in the true economy."
The premium investors demand to hold Spanish 10-year debt over the German equivalent fell to around 312 basis points following the auction, the lowest since March last year.
Spain's Treasury Secretary Fernando Jimenez Latorre said on Tuesday the government sees the economy contracting by 1 percent to 1.5 percent this year, compared with a previous official forecast of 0.5 percent shrinkage.
Prime Minister Mariano Rajoy is set to unveil a fresh round of reforms this week, but has said he will focus on helping small businesses rather than fresh cost cuts or tax hikes as the focus of euro zone policy makers shifts to stimulus from austerity.