Europe Again In The Spotlight After Latest Weak Spanish Auction, Sends Futures Much Lower

Tyler Durden's picture

While the key topic this morning is the BOJ's intervention in the JPY, which had been selling the Japanese currency virtually all night and was rumored to be constantly on the USDJPY bid (a move which is doomed to failure just like all such previous attempt by a central planner to take on the Bernank), the primary reason why futures are largely in the red is due to yet another very weak Spanish auction which sold €3.3 billion in 2014 and 2015 bonds at the highest yield since 2000. This is despite the rumored resumption of ECB bond buying as was reported by the Telegraph previously, a development which would mean that monetization via currency devaluation has commenced indirectly in Switzerland, Japan and the Eurozone, (soon the UK) in advance of the Fed's own third QE round. As for the Spanish bond auction specifics, the Treasury was expected to sell between €2.5 and €3.5 billion, ending with an amount of €1.111 billion of 4.4% bonds due 2015, a yield of 4.984% and a 2.4 Bid To Cover, and €2.2 billion in bonds due 2014 at a just modestly lower yield of 4.813% (compared to 4.291% in July) - the Bid To Cover was also a very weak 2.14. Once again, all these results assumed the ECB would backstop futures secondary market purchases: should this be proven to be a bluff, look for Spain to follow Italy in a self-imposed bond market exile.

As for the immediate aftermath, it was quite ugly: Spain’s 10-year spread over bunds widened slightly after the auction drew lower bid/cover ratio, higher yields and less-than-targeted issue. Spain 10 year spread over bunds widened back to 368bps from 361bps earlier this morning; still below yesterday’s record high of 385bps. Yield on the 10 year note fell 14bps to 6.11%; hit 6.04% earlier. Yield on Spain’s 4 year bond due January 2015 fell 11bps to 5.09% on the day, a second day of decline.

Reuters has much more:

Spain paid sharply higher yields to sell 3.3 billion euros ($4.70 billion) of bonds on Thursday after a renewed market attack that has driven its costs of borrowing close to unsustainable levels.


The Treasury sold 2.2 billion euros of a 2014 bond, and 1.1 billion euros of a 2015 bond, bringing the total sale close to the top end of the Treasury's 2.5-3.5 billion euro target range.


Spanish yields have soared to their highest level since the inception of the euro as a still-deepening debt crisis threatened to swallow the larger economies of Italy and Spain.


Average yields for both Spanish issues were the highest at a Treasury sale of such maturities since 2000.


Dealers said that demand had been helped by market talk the European Central Bank would re-start its bond buying programme to aid the struggling peripheries.


"The fact they are short-dated bonds, and speculation the ECB will buy bonds again has seen aggressive buying by primary dealers," said an official from one major bank in London.


"The question is what happens now -- if the ECB does not buy bonds then there could be a big sell-off in the periphery."


He also said that Chinese accounts had been buying debt issued by the euro zone's highly-indebted periphery in recent weeks.

The bond sales were the first since Prime Minister Jose Luis Rodriguez Zapatero called early elections last week, adding to uncertainties ahead for Spain as it battles to generate more economic growth and escape the crisis.


Zapatero delayed holidays this week to discuss ways out of the turmoil with ministers and will stay in Madrid on Thursday, his 51st birthday.


The average yield on the 2014 bond was 4.813 percent, up on the 4.037 percent the last time it was sold on June 2. The average yield on the 2015 bond was 4.984 percent. The bond was last sold in 2009.


The yields were both below the 5 percent mark, crossed on Wednesday on the secondary market.


The yield on the benchmark ten-year bond was around 6 percent on Thursday, close to euro-era record highs.


Analysts remain concerned government financing is unsustainable over a long period at these levels and should they rise above 7 percent would eventually force Spain to call for a bailout following Portugal and Ireland when they paid similar rates.

Next up: the market looks at the ECB, and specifically to Trichet's languages as to when the grumpy old man was admit defeat and start lowering rates... Just like the last time he launched a horribly misguided tightening campaign. And then, of course, we have the NFP tomorrow.

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JOYFUL's picture

this is the end, my beautiful friend...this is, the end 

\jim morrison...\the doors

westboundnup's picture

Remember when bonds were purchased by people?

ZeroPower's picture

Weak? 15s were 2.4x oversubscribed.

Forget the higher yield, the ECB is 'on it'.

Ghordius's picture

"when the grumpy old man was admit defeat and start lowering rates... Just like the last time he launched a horribly misguided tightening campaign"

I wonder why Tyler thinks the tightening campaign was misguided? Because it was doomed from the beginning or because ZIRP is the only "right" option? From what ZH comments usually are I would think because of the first, but sometimes I have my doubts...

I think he tried to do his job. Such super-low rates just build up an unpleasant future.

BigDuke6's picture

i seem to be reading the articles more than the comments these days - am i getting old?

Anyway i'll try and give some extra analysis.

it seems the Spanish government has repeatedly emphasised that the country is in a much better budgetary position than other eurozone members. At the end of this year, Spain’s public debt is expected to be 67 per cent of GDP, well below the comparable figure of 80 per cent for Germany and France, let alone Italy’s 120 per cent.

Ever tried to get welfare in spain? - bloody difficult

Spain has also introduced an austerity budget aimed at slicing its budget deficit to 6 per cent of GDP this year, from 9.2 per cent last year and 11.1 per cent in 2009. But the success of the budget cuts depend crucially on the cooperation of the 17 Spanish regional governments, which control more than one third of public spending. Madrid has ordered these regions, which are fiscally autonomous, to curb their deficits, but it has little power to force them to do so.  Familiar scenario.

As a result, folks are concerned that a blow-out in regional government deficits could undermine Spain’s efforts to improve its finances. These concerns were heightened last week when rating agency Moody’s threatened to downgrade Spain’s credit rating in response to the country’s rising borrowing costs, weak economic growth, and the continued budgetary problems facing the regional governments. Moody’s also took the step of downgrading six Spanish regions to reflect the “deterioration” in their fiscal and debt positions.

They really have a goodam nerve don't they?

Ghordius's picture

Yess, it's a sign of old age. Try writing more "bitchez", makes you look younger! ;-)


Moody's and co.? They are just following orders. The CDS Beast has to be fed. Banker's bonuses have to be made. The real situation of Spain is only the backdrop of the great derivatives game. Gambling (a classical result of monetary expansion) is much more profitable then investing, and more fun, too! In Weimar Germany, at the end, everybody was gambling.

Cassandra Syndrome's picture

I predict that during the "Press" conference, JCT says "appropriate" 57 times and rubs his lips with his handkerchief 8 times 

Ghordius's picture

Is rubbing lips a different sign from trembling lips? I'm used to times where rates counted, now it's all about lips. CB Chairmans definitely need some cosmetic surgery.

Cassandra Syndrome's picture

A nervous tick for lying through his teeth maybe?

StychoKiller's picture

Sometimes, eating your wordz leaves a bad taste in your mouth!

overmedicatedundersexed's picture

any guess in which country the FRN will be stronger in the future when I book a vacation there they pay me?? Japan? Italy? Spain? Ireland? help welcome.

Ghordius's picture

I would suggest Argentina. Talk with the people, they will give you some tips for the future.

Version 7's picture

Like how to kill an animal and eat the meat raw.

overmedicatedundersexed's picture

lol, guess i could buy a ranch next to the bush's

topcallingtroll's picture

All this really seems to say buy gold, but i learned a long time ago when i wanted to buy it was time to sell and vice versa.

This time looks different. The recent truce in the currency war has been violated.

Curtis LeMay's picture

Some quick facts about Spain:


- 20% unemployment

- 40% unemployment for those under 25 years old

- And here's a real doozy: Spain has TWICE the amount of empty homes, built on speculation, than the US, even though Spain has 1/7th the population of the US, and 1/10th the GDP...

- Germany will simply not partake in the expansion of the EFSF. Leading economists and market Gods insist that the EFSF must be quadrupled in size in order to even have a chance of bailing out Spain and Italy, and if anyone actually thinks Frau Doktor Merkel would have the nerve to even approach the German people and the Bundestag with the idea of quadrupling Germany's debt guarantees to the eurozone, then I have a brdige to sell you between Manhattan and Brooklyn - real cheap too! ;)

There was a big-shot from Nomura on TV yesterday morning and he made a really good point, which I wanted to pass along.

He said that if the ECB goes around buying five million of PIIGS bonds here, 10 million there, he'd see that as "normal" behavior  - in that such actions will be viewed by traders as the ECB simply just trying to tweak bond rates.

He then said that if traders see the ECB buying $100 million here a quarter Billion there, they will know for sure that the ECB senses deep crisis in either Spain or Italy, and then there will be real panic in the sovereign bond markets.

Can't argue with that...

The PIIGS are screwed, and so is euroland.

chinawholesaler's picture

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