Spain has sought to reassure investors it is on track to meet its budget targets after its short-term borrowing costs jumped by around half a percentage point at a debt auction.
Investors who worry that Spain might be the eurozone's next crisis economy took some comfort from heavy demand at the sale of €1.97bn (£1.74bn) in treasury bills, prodding the euro higher on the currency market.
But the average yield for the three-month bills jumped to 1.371 per cent compared with 0.899 per cent in March, and six-month rates to 1.867 per cent from 1.361 per cent.
"Although these yield levels are perhaps still currently more cause for concern rather than outright alarm, there is little scope for further such increases in short-dated funding costs before the market begins to get spooked over the prospect of Spanish contagion," said Rabobank rate strategist Richard McGuire.
Treasury Secretary Carlos Ocana said public deficit figures for the first three months of the year showed Spain was on track to stay within its target ceiling of six per cent of GDP this year, down from 9.2 per cent in 2010.
"The deficit target should be met considering the data we have until now," Ocana said.
But speculation that Greece may have to restructure its debt, denied by officials, and talks on the eurozone's third bailout in a year in Portugal have pushed up Spain's refinancing costs and fuelled concerns it may be next.
City A.M. Reporter