Spain's borrowing costs fell at a bond auction today as the nation edged toward a second bailout amid European leaders' discussions about the European Central Bank's role in curbing the fiscal crisis.

The treasury in Madrid sold €4.51 billion worth of bonds, in line with the €4.5 billion sought. The yield for 12-month bills fell to 3.07 per cent from 3.918 per cent at the last sale on July 17th. That on 18-month bills fell to 3.335 percent from 4.242 percent last month.

The yield on Spain's benchmark 10-year bond yield was at 6.25 basis points this morning in Madrid, down from a euro-era record of 7.75 per cent on July 25th, as investors anticipated the ECB will buy sovereign debt on the secondary market.

The gap between two-and 10-year yields has swollen since ECB president Mario Draghi unveiled a plan to buy short-dated debt on August 2nd.

Demand was 1.91 times the amount sold for the 12-month securities, compared with 2.23 times in July. The bid-to-cover ratio for the 18-month bills was 3.98, up from 3.66.

The treasury met its target even after Germany's Bundesbank yesterday stepped up its criticism of the ECB's plan to embark on potentially "unlimited" government bond purchases, widening a rift over how to tackle the fiscal crisis.

Government bond purchases by the Eurosystem "entail significant stability risks," the Frankfurt-based central bank said in its monthly report.

Spanish and Italian 10-year bond yields slid yesterday to the lowest in more than six weeks after German magazine Der Spiegel reported the ECB's new programme may set yield caps. In response, the ECB issued a statement saying it's "misleading to report on decisions which have not yet been taken."

Spain returns to the market on August 28th to sell bills. The treasury said earlier this month that it had covered 72.2 per cent of the medium and long-term debt it plans to sell this year.

Bloomberg