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Spain’s yield spiked, but things could have went much worse…
May 6 (Bloomberg) — Spain paid the highest yield since May 2008 to sell five-year bonds in Madrid as investors demanded a greater return after a rating cut fueled concern the nation will struggle to control its budget deficit.

The Treasury said it sold 2.35 billion euros ($3 billion) of the notes in an auction at an average yield of 3.532 percent. The yield was 2.816 percent when Spain sold 4.5 billion euros of the same securities on March 4 this year.

Prime Minister Jose Luis Rodriguez Zapatero is trying to cut a budget deficit that’s almost four times the European Union’s limit and attract investors after a ballooning deficit in Greece led to a plunge in Greek bonds and a 110 billion-euro rescue for that nation led by euro-region governments.

“You’re seeing a very strong flight to quality,” Charles Diebel, senior fixed-income strategist at Nomura International Plc in London, said before the auction. “Until we get some more rational behavior in the markets it’s adult swimming only. There are so many cross currents.”

Investors are demanding the biggest premium in yield to buy 10-year Spanish bonds rather than German bunds, Europe’s benchmark securities, since the euro’s introduction in 1999. The spread narrowed to 1.37 percentage points as of 10:56 a.m. in Madrid compared with 1.39 percentage points before the auction.