Negligible Demand For Spanish Treasury Bills Leads To Plunge In Auction Bid To Cover From 7.62 To 2.47 In One Month
While Europe continues to bask in the very transitory glow of a rumor driven respite from the now daily collapse, the funding costs rise. And the market is not happy, as confirmed by the just complete Spanish auction of E3.2 billion (E3.5 billion had been targetted) in 77 and 175 Day bills, which were, for all intents and purposes, failures. Summarizing, E1.6b of 77-day bills were sold at an average yield of 1.692% compared to 1.357% on Aug. 23. The Bid-to-cover plunged to a paltry 2.47 compared to a solidly overbooked 7.62 at the last sale. The last six auction average was 1.41% for the interest and 6.46 for bid-to-cover. Spain also sold E1.6 billion 175-day bills at an average yield of 2.665%, half a percent higher compared to the August 23 auction where the country could still raise debt at a cheap 2.187%. Bid-to-cover 3.95 vs 3.60 at last sale. And since this paper has to roll constantly (or between 2 and 6 months), any transitory interest benefits have now been lost and the vicious circle of deteriorating funding will continue to impact short-term debt raises by Spain, which in turn will force primary interest rates to raise again and so ad inf.
Reuters has more color on the auction:
Spain sold 3.2 billion euros of short-term debt on Tuesday in well-received but expensive auctions for the Treasury reflecting doubts about whether and when European leaders can end the euro zone debt crisis.
The amount sold was just over the mid-point of the Treasury's 2.5 billion euro to 3.5 billion euro target.
Talk of an extension to the European Financial Stability Facility did at least give debt markets some optimism before the auction, even if Economy Minister Elena Salgado denied it could stretch to 2 trillion euros.
The yield on the 3-month bill was 1.692 percent, up from 1.357 percent in August. On the 6-month bill the average yield was 2.665 percent compared with 2.187 percent last month.
"Picking up short-term debt at these prices is pretty attractive so it's no surprise that it's gone well, but these levels are not sustainable in the long-run," said Jo Tomkins, analyst at consultancy 4Cast.
She said the auctions had been helped by an improvement in risk appetite in the last two days on the back of speculation the EFSF would be increased in size.
Spain has faced high borrowing costs for both its short-term and long-term debt for months as markets fear contagion effects from the unsolved Greek debt crisis.
We wonder how long the idiotic market will go with rumors spread by former WSJ Moscow bureau correspondents, as opposed to facts spread by German ministers of finance, or as the following snippet from Reuters indicates, from Spain's Salgado:
An extension of the European Financial Stability Facility to 2 trillion euros ($2.7 trillion) as speculated about by markets is not on the table, Spanish Economy Minister Elena Salgado said on Tuesday.
"It is not on the table, nor has it been discussed," she said in an interview on Spanish television.
The euro fell 0.35 percent against the dollar to $1.3492 after Salgado's comments. Before she spoke, the single currency had made a tentative recovery from Monday's lows below $1.34 on talk policymakers were planning to boost the size of the EFSF, halve Greece's debts and recapitalise banks,
On Monday European Central Bank Governing Council member Ewald Nowotny said an increase in the regional bail-out fund was being discussed but that it might not be as high as some expect.
Salgado also said Europe's banks may need to be recapitalised further.
"At the IMF meetings the word that came up the most was 'fire-wall', so that countries have a set of measures to protect our economies ... part of those fire-walls may be the need for European banks to be recapitalised further."
As for Spain, she said the country's banks had already taken action to recapitalise.