Global Recession Accelerates As Spain Continues To Fund Itself At Record Unsustainable Yields

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Hours before Spain is expected to present the bank "assessment" from Roland Berger and Oliver Wyman on its comprehensive bank insolvency status, the country sold €2.22 billion of two-, three- and five-year government bonds, in a sale which saw solid demand but yields that are simply laughable and are completely unsustainable, culminating with a record yield on 5 year paper. Per Reuters, the Treasury sold 700 million euros worth of a 2-year bond, 918 million euros worth of a 3-year bond and 602 million euros of a 5-year bond, beating a target to issue up to 2 billion euros of the debt. Demand was high, with bid-to-cover ratios rising on all three maturities from the last time each of the bonds was sold in a primary auction. The Treasury sold the April 2014 bond at an average yield of 4.706%, more than double that paid at the last primary auction of the paper in March of 2.069%. The bond due in July 2015 had a yield of 5.457% compared to 4.876% in May, while the longer dated July 2017 bond sold for 6.072%, compared to 4.960% last month. This was a record high yield. In a nutshell: big demand for paper that will leave Spain pennyless. Not very surprising, and as Elisabeth Afseth from Investec summarized, "They got it away, it's about the most positive thing you can say about it."

Elsewhere, in the aftermath of the disappointing China PMI update,  there was nothing to smile about the German economy either whichcontinues to deteriorate from carrying the weight of the PIIGS on its shoulders, as the Mfg and Services PMI both missed estimates of 45.2 and 51.5, and printing at 44.7 and 50.3, respectively. This was a 3 year low for German PMI and now all but confirms that the economy will enter a recession at the next GDP update.

The PMI-implied European GDP is a disaster and getting worse.

But all this pales in comparison with the latest update of the Greek comedy where we learn that the three parties forming Greece's new coalition government have agreed to ask lenders for two more years to meet fiscal targets under an international bailout that is keeping the country from bankruptcy, a party official said on Thursday. This came a few hours after a German parliamentary group officially spoke against a time trade-off for Greece. Which means that beggas will not be choosers after all.

Some sell side views on the latest Spanish auction. If you don't read these don't worry. There will be many, many more to come.

ELISABETH AFSETH, FIXED INCOME ANALYST, INVESTEC, LONDON

"They got it away, it's about the most positive thing you can say about it. Also it's above the modest target they have set for themselves, but the yields are not anything to be too pleased about it. These are high levels."

ACHILLEAS GEORGOLOPOULOS, STRATEGIST, LLOYDS, LONDON

"I don't think it's such a surprise. I think the market, especially based on the 2 billion target, thought that it would be easily absorbed but of course there was always some fear.

"The first worry is can they fund from the markets? So they raised 2.2 billion versus a 2 billion target, so they can raise the money. Then the (question is), are the yields threatening for the medium term? And yes, clearly they are much higher than the previous auction, which was widely expected. But still they can continue for a few months to fund at these levels."

MICHAEL LEISTER, STRATEGIST, DZ BANK, FRANKFURT

"The figures look really strong by all means. They overshot the maximum target range but also the pricing looks really strong. All the bonds were issued at more than 20 cents above secondary market levels.

"Although here the negative is the heavy tail on all three lines that indicates quite a dispersion of bids.

"To be fair, this is not really a huge surprise for the market with this latest turn in sentiment and the heavy cheapening we've seen over the last weeks. It was always to be expected that at least today they would print numbers along these lines."

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, LONDON

"The auctions have all been well bid, particularly the 2014s which came through the market and was also very well covered. The rally over the past three days will have helped garner this strong bidding, seemingly with the market not wanting to be short given the pending talks regarding the EFSF/ESM."

NEWEDGE STRATEGY, LONDON

"All lines were well received, with a total bid/cover of 3.5 times. Not surprising given the small size on offer...Talks that the EMU governments might use the EFSF/ESM funds to buy periphery bonds on the secondary market might have been a supportive factor at today's action.

"Details of today's auction show rising yields versus the previous taps, due to the massive uptrend in yields that was only partially offset in the past three days. Current yields are - in our view - a sign that the market is still pricing in risks of a euro break-up."

LYN GRAHAM-TAYLOR, RATE STRATEGIST, RABOBANK

"These are a strong set of bid covers although obviously yields are at extremely elevated levels (with the five-year above the psychologically significant 6 percent level). The strong set of bid/covers is likely to have been driven by the hope that some form of secondary market purchase scheme will soon be implemented and that this will see a rapid reduction in yields. All in all a result that was largely expected, albeit with a higher than anticipated set of bid/covers."

NICK STAMENKOVIC, RATE STRATEGIST, RIA CAPITAL MARKETS, EDINBURGH

"Peripheral markets relieved that Spain managed to raise...a tad above the upper end of the target. Demand was decent for all three auctions, probably driven by domestic investors, but yields significantly higher than previously, indicative of the rising risk premium demanded for purchasing Spanish government bonds. Against this backdrop short-dated yields should rally further near-term as shorts are covered amid rising hopes of policy action at next week's key EU summit, steepening the yield curve."