Weak Spanish auction turns up the pressure on Madrid

Bond investors delivered a blow to the Spanish government yesterday as they shunned Madrid's first debt auction since the austerity budget unveiled by the centre-right administration of Mariano Rajoy last week.

Spain managed to offload €2.6bn (£2.1) in bonds with maturities of between three and eight years. The debt placed was towards the bottom end of Madrid's target range of €2.5bn to €3.5bn. The interest rate the Spanish government was required to pay to offload the debt also rose to 5.3 per cent, in a sign that investors are demanding a high premium to compensate them for default risk.

In the wake of the disappointing Spanish auction, Mario Draghi, the president of the European Central Bank, announced that it is too soon to discuss winding down monetary support for the eurozone. "Any exit-strategy talk for the time being is premature," he said at the ECB's monthly press conference in Frankfurt. The central bank has injected close to €1 trillion into the European banking system since December.

The ECB president refused to comment specifically on the Spanish auction, but he did argue that the recent uptick in Italian and Spanish bond yields is a signal from investors that governments in Rome and Madrid need to push ahead with their promised austerity measures and labour-market reforms. "I would regard recent developments not as a sign of fragility, but as a sign that markets are expecting reforms. Markets are asking governments to deliver" he said. The ECB kept its main policy interest rate on hold.