Following last week's blatant secondary bond market intervention ahead of Italy's two auctions which even Willem Buiter predicted would need central bank intervention (ECB, but any would work), we were waiting to see if the ECB would announce an increase in its bond purchasing activity via the SMP for the week the passed. It did not. Which leaves just one culprit to explain the dramatic moves ahead of bond auctions (which naturally set the mood and allowed the primary issuance to proceed smoothly and not bring down the euro). China. And we venture to assume that it was China again who started buying bonds in the secondary market ahead of today's 4:30 am and 5:00 am issuance of €4.5 billion in 12 and 18 month bills and €1.25 billion in Greek 3 month bills, which resulted in the 10 year tightening -7bps to 1550; after it hit 1564bps earlier today, highest since at least 1998, while Italy's 10-yr yield over bunds tightened -22bps to 310bps vs yesterday’s 332bps, the highest since 1996. Yes this was before the auctions on no good news, and happened just as gold hit an all time high of just under $1610. Sure enough, following this sudden spike in buying interest, the auctions priced tremendously, and have resulted in a major shift in market sentiment in the past 3 hours, leading to a surge in Italian financial stocks, a jump in the EUR and thus a spike in futures.
Below are the results for Greece:
Greece's Public Debt Management Agency (PDMA) sold 1.625 billion euros ($2.3 billion) of 3-month T-bills on Tuesday, with the yield easing compared to a previous June auction.
The sale was covered 3.08 times with Greece paying a yield of 4.58 percent, down from 4.62 percent in a June 21 auction, PDMA said
And for Spain: the 12-month priced at 3.702% vs a 2.695% average, the bid/cover 2.18 vs 2.85; the 18-month priced at 3.912% vs 3.260%, the bid/cover 5.5 vs 3.91.
Disagreement among European policymakers on Greece and the handling of the euro zone's debt crisis helped push 18-month Spanish Treasury-bill yields to nine-year highs in an auction on Tuesday.
The Spanish T-bill auction was the latest litmus test for investors' appetite for debt from vulnerable euro zone economies.
Spain sold 4.4 billion euros ($6.2 billion) of 12- and 18-month T-bills, at the top end of the targeted range of 3.5 billion to 4.5 billion euros with demand highest for the long-dated paper.
"Spain is hanging on by a whisker at the moment. The euro zone debt crisis has developed into a crisis of confidence and dilly-dallying by euro zone officials is not helping matters," economist at 4Cast Jo Tomkins said.
Concerns that little progress would be made at a euro zone meeting on Thursday has spooked fixed-income investors, sending debt costs for large peripheral economies Spain and Italy to euro-era highs on Monday.
Spain will face a still tougher test of investor appetite when it seeks to borrow over a much longer term on Thursday, issuing up to 2.75 billion euros in 10- and 15-year bonds at around 0840 GMT.
"This is ill timed ahead of the summit but even if they find a solution on Greece it doesn't answer the question of Spain and Italy, which are too big to fail. It's raising questions about the future of the euro," Tomkins said.
Ten-year bond yields in Spain fell back slightly on the secondary market Tuesday, though held near the peak of 6.3 percent, with a move above 7 percent considered unsustainable for the euro zone's fourth largest economy.
The rest is history, and another European rout has been prevented courtesy of a gentle tug in the bond market just when it was needed. Thank you China.