Spain's borrowing costs surged at its first auction sincebecoming the fourth euro member to seek a bailout, with theTreasury paying the most for at least eight years to sell debt forone year.

The Treasury sold 2.4 billion euros ($3 billion) of 12- monthbills at an average rate of 5.074 percent, 2.1 percentage pointsmore than the 2.985 percent paid on May 14. It also sold 639.3million euros of 18-month debt at 5.107 percent, compared with3.302 percent last month, the Madrid-based Bank of Spain saidtoday.

The euro area's fourth-largest economy, which is due to sell 2billion euros of bonds on June 21, is urging European authoritiesto act so it doesn't lose access to financial markets. Its bondshave dropped to euro-era lows since requesting as much as 100billion euros of aid to shore up its banks on June 9.

“The market is getting towards a distressed situation,”Harvinder Sian, a fixed-income strategist at Royal Bank of ScotlandPlc in London. “There will be nerves ahead of the bond auction andwe would expect to see most of it absorbed by the domestics.”

The Treasury aims to sell bonds maturing in 2014, 2015 and 2017on June 21. Budget Minister Cristobal Montoro yesterday called onthe European Central Bank to prop up the nation's bond market as10-year borrowing costs surged to more than 7 percent for the firsttime since the creation of the euro. That yield traded at 7.064percent at 11:40 a.m. in Madrid, down from 7.105 percent before thesale and 7.158 percent yesterday.

Spanish banks hold 29 percent of the nation's outstanding debt,up from 17 percent at the end of last year. Non-residents hold 37percent, down from 50 percent at the end of 2011, Treasury datashow.

Demand at the auction today for the 12-month securities was 2.16times the amount sold, compared with 1.84 times last month. Theratio on the 18-month debt rose to 4.42 times from 3.23. TheTreasury sold a total of 3.04 billion euros of the securities, justmore than the 3 billion-euro maximum set for the auction.

Investors are concerned the nation may need further European aidas it has struggled to clean up lenders for three years. At thesame time, the government needs to curb the euro area'sthird-largest budget deficit just as the economy is mired in itssecond recession since 2009.

Bank Audit

As part of efforts to restore confidence, Prime Minister MarianoRajoy's government, in power since December, has commissioned anindependent stress test of banks to help it determine how much ofthe 100 billion-euro European loan it will need to tap. The reportsare due on June 21.

In a second test, four auditors will carry out a detailedassessment of lenders' books. Those reports, initially due at theend of July, won't be published until September, a person familiarwith the plans said today. An official at the Economy Ministry, whoasked not to be named, declined to comment on the timetable.

Bloomberg News