Did the first (of many) European LTRO buy just one month of marginal improvement? According to a compilation of analyst views by Bloomberg, who looked at today's mixed Spanish auction results when the country sold €4.56 billion of three-, four- and five-year government bonds, the easy money may have been made. Because while average yields fell for all three lines at the auctions, maintaining the trend at Spanish debt sales so far this year, it was the internals that showed weakness and could indicate that the marginal benefit from the first LTRO is now ending, even as the real task - the longer-dated bonds 10 years and great - still have to see much if any carry trade benefit at auction. Lastly, anyone hoping for a full carry flush from the European banks has to give up all hope: ECB announced its deposit facility usage rose to €486.4 billion, up €14 billion overnight. And with that we now know what the LTRO half-life is.
From Bloomberg:
- Spanish yields rose across the curve after Spain sold EU4.56b in bonds; mixed results suggest support from ECB’s 3-yr LTRO is waning, analysts said.
- Monument’s Marc Ostwald says “key negative” is that price tails are getting larger; tail on 2017 bond a “whopping 0.623”
- Not difficult to conclude the fall in yields means they are at “levels where demand is ebbing;” floor may be appearing he added
- Suggestion about diminished carry trade playing a role appears to have more than a little credence
- “Solid result, but not as impressive as January”
- Rabobank’s Lyn Graham-Taylor says cover was mixed; “a reasonable set of results, not a humdinger”
- “Possible what we are discerning here is a loss of LTRO-related front-end momentum:” Graham-Taylor
- Treasury has capitalized on LTRO with YTD sales representing 24.8% of targeted issuance vs 9% at same point in 2011: Graham-Taylor
- Newedge’s Annalisa Piazza says yields “much lower;” says demand may have been bolstered by short-covering
- Says yields rose across the curve as “speculators might now take some profits;” says may just be S/T move: Piazza
And a full sampling of analyst comments from Reuters:
ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE, LONDON
(On France):
"Most of the supply was concentrated in ...the new 10-year benchmark. The paper was very well received. Good demand for the paper was anticipated. Indeed, grey market valuations suggested that the line looked cheap(ish) versus the French curve, offering a 10 bps yield pick-up versus Oct-21. Spreads versus Germany have tightened but still remain above the Q3 2011 average as France is seen "at risk" given the uncertainties due to the upcoming elections. Dealers might have seen some value in the French paper then, betting on a smooth outcome of the election.
"As for the off-the run lines, demand was super strong...Not really surprising, given the small size on tap and demand coming from dealers who usually want to close their shorts."
RICHARD MCGUIRE, RATE STRATEGIST, RABOBANK, LONDON
(On France):
"A positive set of French auctions with the upper end of the indicative range issued and cover firm relative to previous sales - most especially as regards the six-year and eight-year taps. This favourable outcome has seen yields edge lower with 10-year yields 3-4 basis points lower in the wake of these sales, the eight-year 2-3 bps lower and six-year yields dipping 1-2 bps."
EARLIER COMMENTS:
MICHAEL LEISTER, RATE STRATEGIST, DZ BANK, FRANKFURT
(On France):
"The focus is very much on the 10-year bond, a positive surprise to my mind is that they almost sold 6 billion of it so almost like a new Bund issue in a way. A bid/cover ration of 1.7 is again good, probably not very good, but a strong one keeping in mind the volume."
"An average yield of 3.13 is also on the strong side."
"We're seeing all these doubts everybody had coming into the year about what impact will the rating downgrades have on primary and secondary market performance were unfounded and the financing capacity of France remains very strong."
MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON
(On France):
"That looks pretty impressive. Covers very solid... I think with the French ones, it becomes less an issue about carry (from LTRO) and more a question about do these look like attractive yields relative to Bunds and the answer is a very definitive yes."
ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE, LONDON
(On Spain):
"Yields were much lower than at the previous tap for all three lines, a sign that demand for Spanish debt remains solid. Some concession was given ahead of today's tap, especially for the Oct-16 that has been tapped three times since the start of the year. However, we suspect most of the demand comes from dealers who wanted to close their shorts.
"Yields across the Spanish curve have increased after the auction, despite the good demand as speculators might now take some profits. However, we think this is just a short-term movement and spreads - versus Germany - will consolidate at the current levels."
MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON
(On Spain):
"The tails are getting larger. So there are still a lot of cheeky bids going in and as much as the average yield is OK relative to the market level ... there are a lot of people who have gone in and have got things a lot cheaper.
"So certainly a long way away from the very impressive results we saw in December and in January, definitely reflecting some resistance to lower yields."
"They are still well ahead of the game. What we have to remember is because they doubled up on a lot of the previous auctions, they are still ahead in financing terms."
RICHARD MCGUIRE, RATE STRATEGIST, RABOBANK, LONDON
(On Spain):
"Today's Spanish auction saw mixed cover - firm for the four-year but softer for the 3-year - but with markedly lower average yields than at previous sales. A reasonable set of results but certainly not the "humdinger" of an outcome as seen at the last two sets of auctions where allotment was considerably higher than the upper end of indicative ranges in both instances.
"It is possible that what we are discerning here is a loss of LTRO-related front end momentum in line with the scale of the rally witnessed in recent weeks. Price action post the sale resonates well with this view."
MICHAEL LEISTER, RATE STRATEGIST, DZ BANK, FRANKFURT
(On Spain):
"The auction looks very much all right. Very much in line with expectations so no surprise this time in terms of size. They didn't overshoot their range.
"What blows the picture a bit is the pricing side of things in that each issue has a double-digit tail. The three-year one in particular has a 13 basis point tail...The key takeaway is they are some 25 percent done with the yearly issuance so that puts them in a comfortable position going forward. But in terms of will this be enough of a trigger to underpin the recent rally of Spanish spreads? Probably not."
PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE
(On Spain):
"The Spanish auctions perhaps reflect that the secondary market valuation of Spanish debt has gotten a bit overcooked. The fundamentals of the auction are sound: large bid cover ratios etc., but the price action is a bit disappointing relative to where the secondary market was this morning and the tails perhaps reflect that the rally is in need of a pause for breath."
ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDAM
(On Spain):
"The fact that the price was below pre-auction (levels) is not so great ... even if we have a lower yield."
"It has been a very strong rally so far so I would not (be surprised) that it has not been as good as the auctions we've seen in the past two months."
"It is very important that they have been able to issue as much as their target, so they are quite far ahead in terms of their issuance target this year."
"It's another auction with lower financing cost so the downward trend is still going on and that will be taken as a positive."