Thanks Draghi: Spanish 10 Year Yield Slides Below US

Tyler Durden's picture

Earlier today something happened which we haven't seen since a very brief period of time in 2010, and then going all the way back to 2007: Spanish 10 Year bond yields tumbled below those on US 10 Year Treasurys.

So is this an indication that the Spanish bond market is suddenly safer, and more credible than that of the US? Of course not. All we are seeing is merely the manifestation of the latest ECB carry trade pushing local banks not to lend the ECB's cheap money out to consumers, but to engage in yet another Draghi-subsidized carry trade.

DB's Jim Reid explains:

There is some concern that drop in the cost of funding won't find its way to the real economy... for four reasons.

  • First, there is nothing in the documentation which was released yesterday which would prevent banks from using the proceeds to accumulate more government bonds, at least for the first 2 years (they would merely be forced to pay down the TLTRO half way through the operation if they fail to step up their lending to the private sector). This is at odds with Draghi’s statement in the Q&A in which he made it clear that the package is not designed to incentivise further “carry trades”. Will we get more conditionality down the line to stop this?
  • Second, substantially reducing banks’ medium term funding cost can be fully passed to final borrowers only if banks consider that they are comfortable  with the current level of their interest margins on lending to the private sector. They have been increasing massively since mid-2012. Banks may want to raise them further, either because they consider that lowering the borrowing rate would not properly remunerate their credit risk, adjusted for the capital charge entailed by this type of activity, or because they still need to organically grow their capital ratio.
  • Third, we don’t know the elasticity of the demand for credit to changes in borrowing rates, but in a context of a preference for deleveraging in some segments of the Euro area, this elasticity could well be lower than usual.
  • Fourth, we should not forget that banks need to pay back the ECB EUR 450bn by February 2015, as the two LTROs expire. Even if they were to use the entirety of their EUR 400bn initial allotment in the TLTRO to fund this, there would still be a “net gap” of some EUR50bn. In a cynical view of the targeted LTRO, it could be considered as simply a 4 year extension of the existing LTRO, at a slightly cheaper cost (25 bps against c.65 bps) and with more visibility on the final cost. Seen in this light, it looks less innovative. For more on yesterday's announcement please read their report.

I was at a big DB macro dinner last night and most clients and DB participants felt that the ECB had prolonged the carry trade whatever the scepticism over the effectiveness of the policy measures for the real economy. So this type of thinking might dominate in the near term.

And to think that Draghi sounded oh so very sincere when he said that his latest monetary experiment was not for the benefit of the banks, and was purely for European consumers and, pardon the snicker, savers...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
wallstreetaposteriori's picture

Yup...Markets are pricing in risk accordingly..

firstdivision's picture

Well when governments are more than willing to back bad bets, I would have to say risk is being priced in.  When your confidence interval to get 100% back 100% of the time, the models work.

Occident Mortal's picture

It doesn't matter any more.


Every intelligent and educated person has come to understand the M.A.D relationship we have with fiat currency.


The real truth is there are more than enough stupid people out there who will never question what their money is, or whether or not they should accept it. For every store owner who wrestles with supply and demand to set prices, there are 200 people who just take money from their employers and go buy whatever crap they can afford.


The hurdle of educating the great unwashed is too high for any kind of run on fiat money to precipitate.


Now we have ZIRP and NIRP and corporations who can borrow money at negative real rates, so of course they raise debt and repurchase their equity as it reduces their WACC. Why do we have this? Because ZIRP is no longer a threat to the onmipotence of our currency. We have reached a new plateau of apathy, people simply don't give a shit about it, and so they will use USD forever.

remain calm's picture

The new abnormal. This is the way it is going to be until its not.

SafelyGraze's picture

people are buying spanish bonds because they know that spain's revenue from income taxes can only rise during the next 10 years as young adults, currently unemployed, join the workforce and contribute the strengthening spanish economy

j carney

kaiserhoff's picture

Sometimes they really do ring a bell at the top.

Thanks, Tylers.

Oracle 911's picture

nb:forever=10 months, max

Fixed for ya.

wallstreetaposteriori's picture

100% CI models scare the living shit out of me..  When "NOTHING" can go wrong, it is certain that "EVERYTHING" will go wrong.

firstdivision's picture

Now you have a model where all assumptions are defined by 'Moral Hazard'

german Wunderkind's picture

spain has a working political system, the us of a, not so much if we remember what last year happend with the ficals cliff...

bingobob's picture

What risk? It can't blow until Americans are disarmed. Mainly because if it were to blow it would be epic!

Cattender's picture

Sweet... time to Max out my CC then i guess.

DavidC's picture

I thought one of the reasons for Draghi's actions the other day WAS to enable the banks to buy Government debt for the next two years.


buzzsaw99's picture


fonzannoon's picture

2 moar years baby! Stawks for the long run!

Tabarnaque's picture

This is sur-real. This whole house of card will fall hard at one point.

AdvancingTime's picture

This sure makes a person question what anything is worth going forward. Because of the uncertainty in today's market and the direction events might take the subject of "value and worth" continues to garner a fair amount of interest and remains relevant. History is chucked full of  distorted markets, debts unpaid, promises unfilled, and bubbles.

These "interesting times" play havoc with the value of things and what they are worth. Like some of the cruel games children play you don't want to find yourself without a chair or holding the "hot potato" when the game ends. Below is the full article sporting a minor facelift and update.


q99x2's picture

I think Spain is safer. They speak Spanish and are allowed to protest.

Devotional's picture

same same with Portugal. 

Quinvarius's picture

Bonds are just a method of transferring paper wealth from central banks to governments.  They are no different than bitcoin for central bankers really.  They are just a payment system where the medium has no real value and everyone knows it. 

AdvancingTime's picture

The bogus trend continues because of Modern Monetary Theory. Often referred to as MMT by its many believers it removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps  allow us to print and  manipulate away problems.

While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is effected by the interest rates. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other countries that were on the brink. What you pay in interest on debt does matter accept in the manipulated land of MMT. Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. More on this subject in the article below.

Cattender's picture

thanks AT now i have another term to try and Remember MMT to go along with: "it's different this time and the New Normal" LOL!

ebworthen's picture

MMT is a lie promoted by neo-charlatan economic alchemists.

The mountebanks of Wall Street use securitization and derivatives instead of cards or cups.  Three card monte and lead into Gold.

ebworthen's picture

"...not for the benefit of the banks...but purely for European consumers and savers"

Yeah, like a tapeworm helps you lose weight and improves your digestion.

orangegeek's picture

Draghi's move last week was a new tax on the masses - that's all.  Taxing savings to funnel more cash into gewberment hands.


These are socialists folks. Europe invented all this "ism" crap in the 1800s as a means to keep cash out of the hands of the masses and into the hands of the "euro-house" families.  socialism, marxism, communism, nazism - all the same centralized control over the masses.


And the tactics are the same too - when things heat up, criticize others.  Nasty fucking DNA running Europe.

hugovanderbubble's picture

Spain is suffering the biggest ever rigged markets conditions ever thanks to European Central bank Manipulation.

We(spain) are financing better than US? Come on, what the hell are the "markets"discounting?, This is absolutlely non sense.

OK, keep playing in this farce Till One day , the whole "HOUSE OF CARDS" blow up.

Spanish 10yrs yield, should be 3,5-4% not less.

(10yrs Spanish Growth) = wont be higher than 2%
(10yrs spanish Inflation) = wont be higher than 2,25%.

But come on 2,6% is aberrant.¡¡¡


B2u's picture

Fuck you Draghi

Spungo's picture

This is brilliant as hell. Borrow at 0% or -1% from the ECB and use it to buy bonds paying 1% or 2%. There's absolutely no currency risk, and the government debt is implicitly backed by the ECB. If I were a banker, I would lever this as much as possible.

disabledvet's picture

Actually a good argument could be made that indeed Spanish debt is safer than American debt as they simply have smaller amounts of borrowing and no "weirdness" in the financial sector (they simply steal your savings rather than extend credit period."

The threat remains in the currency space...with the uber euro how does one compete in the global marketplace? Without the uber euro how does one even raise capital period?

skydrake's picture

So is this an indication that the Spanish bond market is suddenly safer, and more credible than that of the US?


Markets told so.

It's the economy, stupid!

Itchy and Scratchy's picture

The gain in spain will likely go down the drain!

Cattender's picture

in spain in Vain? or will it begin to Rain?

alpha66's picture

corzine was right

bingobob's picture

Leverage can be a bitch!


alpha66's picture

Corzine was right.

cordial savage's picture

So, possibly an irrelevant point to make.  (Great disclaimer, right?)  The Spanish yield shown is the EUR rate.  The USD rate is about 135bps higher.