By Paul Day and Alexandria Sage
MADRID/PARIS (Reuters) - Demand rose and costs fell at a Spanish bond sale on Thursday, suggesting yield-hungry investors are unconcerned that the financial turmoil in Cyprus might spread to other parts of the euro zone.
The Treasury sold 4.5 billion euros (3.8 billion pounds) at the sale of three maturities, including its 10-year benchmark, beating the top end of its target range of 3 to 4 billion euros.
"It's a very good auction ... Contagion fears for the time being are not materialising and we believe this is going to continue," rate strategist at Commerzbank in London Michael Leister said.
Cyprus has faced the prospect of bankruptcy since Tuesday, when its parliament voted unanimously against a levy on bank deposits and continues to search for a new plan to find billions of euros to qualify for European aid.
In a bond auction in Paris, France also hit the top end of its target range, selling 7.99 billion euros of a new 2015 bond and its benchmark 2018 paper, shrugging off data showing rapidly business activity was shrinking rapidly.
"(The French auction) also appears to be a solid set of results. The amount of funds to be put to work together with the promise of the ECB to do what it takes still seems to be overriding any concerns stemming from Cyprus," said Lyn Graham-Taylor, strategist at Rabobank in London.
Investor fears over the euro zone reached fever pitch last summer, pushing borrowing costs on debt issued by struggling peripheral economies - including Spain - to unsustainable levels.
European Central Bank pledges to do anything necessary to protect the monetary union, including effectively backstopping investor portfolios via bond purchase, brought yields down sharply.
They have since stabilised, with neither a deep economic slump across the bloc, nor the crisis in Cyprus, nor political stalemate in Italy dampening investor appetite for sovereign bonds.
Taking advantage of benign markets, Spain has forged ahead with its 2013 debt programme and, following Thursday's sale, has covered 34.3 percent of its debt issuance for this year, including a new 10-year benchmark.
Even though no country has yet tapped the ECB for support for its bond, the promise has meant Spain's dire economy - not expected to emerge from its more than a year-long recession until next year - massive unemployment and high deficit have become less of a worry for investors.
"Clearly there is no Cyprus angst or Italy angst in that sale. They sold more than they were targeting," said Marc Ostwald, strategist at Monument Securities in London.
"It is basically people reaching for yield. You can't make any returns in Bunds, or in gilts or in Treasuries."
The risk premium investors demand to hold Spanish over German debt fell sharply after Thursday's auction, to around 347 basis points, a long way from euro-era highs last July of around 650 bps.
Spain sold 2.3 billion euros of the benchmark bond due in January 2023, with yields dropping to 4.898 percent from 4.917 percent in a sale at the beginning of March. Demand outstripped supply by 1.9 times compared to 2.3 times previously.
Yields also fell on the March 2015 and January 2018 bonds.
France, meanwhile, sold 5.0 billion euros of a November 2015 bond at 0.32 percent, and 2.99 billion euros of a May 2018 bond at 0.89 percent.
(Editing by John Stonestreet)