We have previewed the phasing out of the LTRO effect previously here on several occasions [7]. Now, courtesy of Art Cashin, everyone is aware that the eye of the European hurricane has officially passed, especially in the aftermath of this morning's horrendous Spanish bond auction [8], which shows that reality is back with a bang.
Spanish Auction Disrupts Europe - This morning, Spain had a bond auction. It needed a flea collar, maybe even two. Here’s a Bloomberg recap:
Spanish Yields Reach 12-Week High on Auction
Spain sold 2.6 billion euros ($3.4 billion) of bonds, near the minimum planned, and borrowing costs rose as the impact of European Central Bank’s emergency lending waned. Bonds and the euro declined.
The Treasury auctioned bonds maturing in January 2015 at an average 2.89 percent, up from 2.44 percent on March 15, while bonds due in October 2016 yielded 4.319 percent, up from 3.376 percent on March 1. Securities maturing October 2020 were sold at 5.338 percent, Madrid-based Bank of Spain said today. The Treasury had set a range of 2.5 billion euros to 3.5 billion.
Spain’s financing costs had been held down by the ECB’s 1 trillion euros of three-year loans to banks, known as the LTRO , some of which have been recycled into high-yielding government debt. Yields had declined as much as 95 basis points after ECB President Mario Draghi announced the policy on Dec. 8 and Spanish banks’ holdings of government debt jumped to 220 billion euros in January from 178 billion euros in November.
“It’s back to reality now, the auction shows the LTRO effect has been exhausted and now demand for Spanish paper is becoming much more price sensitive,” Peter Chatwell, a London-based fixed-income strategist at Credit Agricole Investment Bank, said in a telephone interview. – Keith Jenkins, Bloomberg.
This was a rather ugly auction and may set an ugly tone, as European markets look to close for three to five days for Easter.
Watch out!