MADRID (Reuters) - Foreign investors piled into Spain's new 10-year bond on Tuesday and the country also beat targets at a short-term debt sale as it made the most of renewed appetite for lending to the euro zone's weaker economies.
With Tuesday's sale, Spain has already raised around 14 percent of its 2013 funding target, while major sovereign debtor Italy has raised around 10 percent.
Spain's budget gap is one of the widest in the euro bloc, and the country is locked in recession with one in four of its workforce unemployed and almost daily protests against painful measures intended to curb government debt.
But with investors reassured by European Central Bank policies and eager to pick up higher-yielding debt, Madrid sold 7 billion euros ($9.3 billion) of its new benchmark bond, which had a coupon of 5.4 percent, the Treasury said. That compared with 5.85 percent on Spain's previous benchmark.
The new 10-year bond - the first in more than a year - drew demand of almost 23 billion euros, it said, describing the sum as unprecedented.
Around 60 percent of that demand was from non-Spanish residents, including just over a quarter from UK investors, indicating a resurgence of interest from investors outside the country.
A government source close to the deal said Madrid chose to cut off at the 7-billion-euro mark in order to leave appetite in the market.
Spain, which has been at the sharp end of Europe's debt crisis on concerns it cannot control its public deficit, also looked to have trumped recent fundraising efforts by fellow euro zone struggler Italy.
Rome sold 6 billion euros of a new 15-year bond on January 15, its first in two years, meaning both countries have already made significant inroads into daunting 2013 funding program.
Using a strong syndicate for Tuesday's sale was "a good excuse for Spain to show that they're not in trouble and don't need a bailout," said Jo Tomkins, strategist at consultancy firm 4Cast.
Spain's budget gap is one of the widest in the bloc and the spending cuts and tax hikes taken to narrow it have brought judges, doctors, bus drivers and garbage workers onto the streets to vent their anger.
Despite the cuts, Spain probably missed its deficit reduction target for last year, although it remains largely on track with its economic program, the European Commission said in a report published in Brussels on Tuesday.
Madrid's funding costs on international markets rose to euro-era highs last July as traders demanded ever higher premiums to hold the country's debt. Yields have since fallen after the European Central Bank pledged to back struggling euro zone states with bond purchases if needed.
Prime Minister Mariano Rajoy has resisted calls to apply for European aid which would trigger the ECB program as yields on Spanish debt tumbled to more affordable levels.
"The ECB will bail them out if the current reforms and austerity does not yield results. It's hard to say how long (they have), no way is Germany not going to firewall Spain," said Skybridge Capital's Anthony Scaramucci speaking from Davos in the Reuters Global Markets Forum. Skybridge is an alternative investment firm with $7.1 billion of funds under management.
Spain's rush to raise money now in part reflects concerns that political tensions, especially over Italy's February election, could dampen market enthusiasm.
"I'm under the impression that the (Spanish) Treasury is making the most of a benign market to increase its liquidity for whatever comes in the future," economist at Cortal Consors Estefania Ponte said.
Spain also raced to frontload issuance in early 2012 to make the most of a flood of cheap loans to banks by the ECB. Spain had completed almost 20 percent of its 2012 issuance plans by this time last year, then struggled to sell significant amounts in the latter part of the year.
But on Tuesday Spain also sold 2.8 billion euros worth of short-term debt, beating the target amount for the auction and paying the lowest average yields since March 2012. The yield on the 3-month bill fell to 0.441 percent, compared with a peak of 2.434 percent when market tensions were at their height in July.
The final price on the 10-year syndicated bond was set at midswaps plus 365 basis points, equivalent to a 5.4 percent coupon.
The Treasury last used syndication in February 2012 for its current 10-year benchmark with a 5.85 percent coupon. The bond was introduced to the market in November 2011.
At 1600 GMT, 10-year Spanish yields were about level on the day at 5.17 percent, while comparable Italian yields also were unmoved at 4.22 percent.
Additional reporting by Manolo Ruiz and Tracy Rucinski; Editing by Fiona Ortiz/Ruth Pitchford/Ron Askew