Spanish government yields fell sharply after the country's debt agency sold nearly €6bn in new bonds at the first auction of the year for the cash-strapped economy.

Spain's Treasury sold €5.8bn in new bonds maturing in two, six and 13 years Thursday with the longer-dated paper attracting an average yield of around 5.555 percent. Investors bid €2.9 for each €1 of debt for sale, Treasury figures show, compared to €2.1 at the previous sale. The new two-year bonds drew an average yield of 2.476 percent and bids of €2.1 for each €1 for sale.

Benchmark Spanish government bonds extended earlier gains after the successful auction, with 10-year yields falling below 5 percent - to 4.96 percent - for the first time since March of last year.

Spain needs to sell around €121bn in new debt this year, an 8 percent increase from 2012, and plans to auction around €10bn each month. Taking into account debt that will mature this year, the net borrowing total is €71bn.

An interesting twist to the sale of new two-year notes was the inclusion of a so-called "collective action clause" (CAC) in the legal paperwork that defines the ownership rights. In effect, the CAC limits the ability of the bondholder to block or delay any restriction in the terms of the debt.

Spain's prime minister Mariano Rajoy has been attempting for months to convince both his people and his foreign investors that Spain will not need to approach the European Union or the International Monetary Fund for formal financial assistance, despite a prolonged recession that will likely stretch into 2014 and political turmoil in the country's biggest and richest region.

Artur Mas, the President of Catalonia who won re-election with an independence platform on November, has vowed to seek permission from the Catalan people to begin secession from Madrid. Spain's central government, however, says any vote on independence would be illegal and promised to take measures to prevent any vote from being called.

Spain's parliament approved its 2013 budget late last year, agreeing to slash ministerial budgets by around 8.9 percent in an effort to reduce the country's deficit to around 4.5 percent of GDP from the current 6.3 percent. The European Union also approved a €41.4bn rescue plan for the nation's biggest banks, including nationalised Bankia, BBVA and CatalunyaBanc.

European Commission figures published in November suggest Spain's economy will contract by 1.4 percent this year, following a similar full-year decline in 2012, before recovering modestly in 2014.