As part of the broadly bipolar risk [ON|OFF] market stampede, Spain probably could have picked a better day to attempt to sell €4.7 billion in bills than just after the weekend when the market realized there is no way out for Greece than default. Alas, it did not, and the result was not pretty. Per Reuters: "Spain paid substantially more to issue 12- and 18-month Treasury bills on Monday compared with last month as uncertainty hovered over a Portuguese bailout and speculation intensified about Greek debt restructuring. The sale was at the low end of the Treasury's target range of 4.5 billion to 5.5 billion euros ($6.51 billion-$7.95 billion) and comes ahead of a closely watched long-term debt auction on Wednesday of bonds maturing in 2021 and 2024." Specifically, the Spanish Treasury was forced to pay 2.77% for its €3.5 billion 12 month Bill, 64 bps more than the 2.128% paid in a comparable auction in March, and making matters worse was a tumble in the bid to cover from 2.4 to 1.6. The weakness was mirrored in the auction of €1.2 billion in 18 month notes, which priced at 3.364%, up 93 bps from last month, with the BTC tumbling from 3.5 to 2.0. And one can wonder what the outcome would have been had the Fed or other central banks not been selling puts on the Spanish curve (because if he is doing it off the balance sheet in the US, there is nothing really preventing Bernanke from taking his curve manipulation tour global). And yes: Spain is next. "Investors are turning their attention to Spain as the next weakest link in the euro zone chain after Portugal said it would seek aid from the European Union and the International Monetary Fund, the third to fall after Ireland and Greece."
"Everyone was very quick to say that there were no contagion risks bubbling out of Lisbon, but people were very rash in those original assumptions," economist at 4Cast Jo Tomkins said.
"Liquidity is definitely dropping back due to the Easter effect on participation in the T-bill auction. The vultures are circling over Madrid, but I think the lions share of the market thinks Spain will be okay."
The difference between 10-year Spanish bonos and the German Bund stood at around 226 basis points on Monday after the auction, up from 214 bps before the sale.
That still reflects vastly lower risk priced in than for Greece and Portugal. The Greek/German 10-year government bond yield spread was last 11 basis points up on the day at 1,079 bps while the equivalent Portuguese/German spread neared 600 bps.
Many economists say Spain has distinguished itself from Portugal, Greece and Ireland after a slew of austerity measures and structural reforms but contagion fears remain and the T-bill auction results suggests a sharp rise in bond yields at Wednesday's auctions.
The yield on the benchmark Spanish 10-year bond with a 5.5 percent coupon, to be auctioned on Wednesday, rose to 5.6 percent on Monday in the secondary market compared to an average yield of 5.162 percent at the last time it was auctioned in March.
What Europe understands all too well is that if and when Spain goes, Italy is next. And then it is all over. Which is why the vigilante fight over this last European domino will be a fantastically engaging one. With the Fed and China all in on the bet as well, look for some serious fireworks.