Spain enjoyed lower interest rates in an auction of long-term bonds yesterday, in a sign of renewed investor confidence in the country’s battered economy.

The Treasury raised €4.13 billion from the sale, well within its target range of €3.5 to €4.5 billion. Demand was strong at €7.7 billion.

The average yield, or rate of return earned by investors, on 10-year bonds was 5.162 per cent, down from 5.20 per cent at the last such auction on February 17 and from 5.174 per cent at Wednesday’s close.

For the 30-year bills, the rate was 5.875 per cent, down from 5.957 per cent on February 17 and from Wednesday’s close of 5.883 per cent.

The Madrid stock market hailed the auction, gaining 0.61 per cent immediately after the announcement, after several days of declines.

The sale comes one week after Moody’s downgraded Spain’s credit rating to “Aa2” and warned it may do so again, on fears the government will be unable to meet its targets of slashing the public deficit and on concerns over the cost of restructuring in the banking sector.

The Bank of Spain hours later announced that the banks will need just €15 billion to clean up their balance sheets, less than the government’s ceiling €20 billion and well below the predictions of experts.

Interest rates were also lower on Tuesday in the first Spanish bond sale since Moody’s downgrade.

Spain’s finances and economy, with a jobless rate of just over 20 per cent the highest in the industrialised world, have prompted fears it may need a costly EU bailout like Greece and Ireland.

The government has strengthened bank balance sheets, cut spending and pursued economic reforms to allay market jitters over the outlook for Spain’s finances.