Spain Election And Benchmark Switch Rouse Duds, As Country Pays Record Yield In Bill Auction

Tyler Durden's picture

It has been a busy morning for the ECB already, as the central banks has been buying up Spanish short-dated bonds following yet another disastrous auction out of Spain, this time a 3 and 6 month Bill auction. Reuters reports: "Spain's Treasury paid the highest yields recorded in 14 years to issue 3 billion euros ($4 billion)of short-term bills on Tuesday, a sign that a resounding election victory for the centre-right People's Party on Sunday has done little to soothe investor nerves. The average yield on the 3-month T-bill more than doubled to to 5.11 percent from 2.292 percent one month earlier, the highest level since the bill was re-introduced in 2003. It sold 2.01 billion euros and was 2.9 times subscribed, after 3.1 times at the October auction. The 6-month T-bill saw yields jump to 5.227 percent from 3.302 percent at the last auction, selling 0.97 billion euros at a bid-to-cover ratio of 4.9 after 2.6 in October" Ironically, yesterday's pathetic attempt to mask market weakness, when Spain forced data vendors to switch their benchmark bonds, as was reported by the FT first, has not fooled the market: "Just a day after borrowing costs soared in a lacklustre auction, the yield on 10-year Spanish debt, which moves inversely to prices, dropped by about 35 basis points on Friday, mystifying traders. However, it has emerged that Thomson Reuters and Bloomberg, the main providers of government bond price data, were asked by the Spanish Treasury to change the main quoted benchmark price, from the new 10-year bond launched on Thursday back to an older one." The result: once again pervasive credit market weakness, which has since spread ot Italy, and at last check forced Draghi to also start buying BTPs. One wonders just how quickly Europe would implode if the buyer of last resort was to actually take a 24 hour vacation.

More from Reuters on the auction:

"It doesn't look great, the continuing trend towards ever higher yields to get anything done, it has to be concerning," said Gary Jenkins, head of fixed income at Evolution Securities.

 

Spanish 10-year bond yields were up just 1.9 basis points on the day at 6.61 percent but five-year yields <ES5YT-TWEB> rose 7 bps to 6.02 percent.

 

The 10-year yield was just 13 bps from converging with that of Italy. Some strategists expect it to go back to trading at a premium over BTPs as investors wait for the new government's fiscal plans.

 

"Underlying sentiment remains negative for the periphery and positive for German Bunds because of the ongoing lack of a political solution to the problems in Europe," RIA Capital Markets strategist Nick Stamenkovic said.

 

Italian 10-year yields were up slightly on the day at 6.73 percent, with little scope seen for a sustainable fall in either Spanish or Italian yields given modest buying from the European Central Bank.

 

"The ECB doesn't want to be seen going soft on some of these countries by intervening unless they are going to put their fiscal house in order," Stamenkovic said.

 

"Ultimately the ECB will have to come in more size and more aggressively to draw a line in the sand. But it looks like any radical action is not going to be possible until next year."

And if not => the end of the world. Yes, yes. We know the script.