Roberto Soldado scored twice before the break, while Andres Guardado and Nelson Valdez completed the rout in the second half.
The result was Valencia's second consecutive 4-0 victory and means Ernesto Valverde's side temporarily move one point ahead of Real Sociedad, who host Granada on Monday.
Rayo's own ambitions of making it into the Europa League appear to be slipping away and they remain 10th in the league, having played a game more than their rivals.
The game had a frantic start. Rayo midfielder Roberto Trashorras nearly scored a wonder goal early on, trying his luck from the halfway line, but his shot went several feet over the bar.
Jose Carlos had Rayo's first attempt on target, shooting straight at Vicente Guiata from inside the area after showing great skill to create the opportunity for himself.
However, Valencia soon asserted their authority on the game. Rayo goalkeeper Ruben Martinez had to make a great save from Pablo Piatti on 13 minutes, and Soldado eventually gave the visitors the lead after 27 minutes.
Dani Parejo was pulled back in the area by Roberto Trashorras, and although Soldado then put the ball in the net, the goal was disallowed and a penalty was awarded instead. Soldado kept his cool from the spot and sent Ruben the wrong way to score.
The striker could have scored again almost immediately after when he ran through on goal but put his shot over the bar, while Parejo then blazed over, as Rayo's defence were overran by Valencia's pressure.
Rayo's right hand side was particularly exposed, and that was where Valencia's second goal came from. Piatti got behind right back Anaitz Arbilla with ease and played a ball across the box, which Soldado was able to nudge home from a few yards out.
Rayo nearly got a goal right before the break, but Valencia stopper Vicente Guiata managed to scramble the ball away. Rayo scored from the resulting corner, but the goal was ruled out for a blatant handball by Andrija Delibasic, who slapped the ball towards goal.
Valencia's superiority continued into the second half and they got a third on 61 minutes. Soldado played the ball to Guardado just inside the area, the Mexican forced a save from Ruben and then followed up the rebound into the net.
Rayo then finally got into the game, and Piti, Trashorras and Delibasic all squandered chances to get a goal back.
Valencia then took the initiative in the final 10 minutes of the game in search of a fourth goal. First Sofiane Feghouli hit the post, then Ruben saved from Guardado, before the goal finally arrived in injury time.
Feghouli played Valdez in with a brilliant through ball, and the Paraguayan striker took the ball beyond two Rayo defenders with his first touch, and then shot past Ruben and into the far corner to round off an imperious performance from Valverde's side, who showed they are not ready to give up on Champions League football just yet