Today's much anticipated Portuguese T-Bill auction carried some good and some not so good news. While the Bid To Cover on the €500 million 12 month paper improved from 1.8 to 2.5, the rate on the 1 year issue surpassed 5% for the first time, and came wide of analyst expectations, pricing at 5.281%, compared to 4.813% previously. Per Reuters: " That was higher than the roughly 5 percent that dealers and analysts had looked for ahead of the sale, though the rise in short-term borrowing costs was much smaller than a more than 150-basis point jump at the previous tender in November. "There is no place to hide on the curve for Portugal anymore. Once again, the auction increases pressure to find a circuit-breaker to limit the damage, which is most likely to mean asking for aid," said David Schnautz, debt strategist at Commerzbank in London." Filipe Silva, debt manager and Banco Carregosa explains why contrary to the EUR's reaction, this is not good news: "This rate is very high and Portugal cannot keep raising its rates at this pace, 47 basis points in just two weeks." Yet despite the weak auction, Sovereign spreads tightened modestly after rumors that the ECB would announce an expansion or a new program to buy peripheral sovereign debt. Which was to be expected: the Portuguese auction was quite irrelevant compared to what happened in Germany earlier, when the country held its weakest 5 Year Bobl issuance in 6 months: in an auction of €4.13 billion in paper, the government saw a mere 1.1 Bid To Cover, the weakest since May, and forcing the government to retain 17.4%, or €0.87 billion of the auction to make it not appear that the auction was a failure.
Germany encountered the worst demand for its five-year debt in over six months at a sale on Wednesday as low yields and growing concern over the cost to Berlin of future aid payments eroded appetite for its bonds.
The German government sold 4.13 billion euros of the re-opened 1.75 percent five-year Bobl note for an average yield of 1.73 percent and a bid-to-cover ratio of 1.1, the lowest achieved since May this year.
"Simply, market volatility is keeping a lot of investors on the sidelines. We've seen yields jumping back and forth from one day to another, not just periphery yields but also the core," Michael Leister, strategist at WestLB said.
"On the other hand, there seems to be growing concern out there that at the end of the day Germany has to support the whole euro system and will eventually have to pay the bill."
The German Finance Agency, the federal government's debt management office, as usual retained some of the issue for "market smoothing" purposes -- 0.87 billion euros this time.
However, with the total amount on offer at 5 billion euros, external bids did not cover all the paper for sale, a similar result to last week's Bund auction.
Contagion: meet Euro core. A few more comparably failed auctions with or without "market smoothing" gimmicks, and the market may just noticed.
And for those interested, full details of the Portuguese auction.
Auction date: 01/12/10 17/11/10
Maturity 18/11/11 18/11/11
Settlement date: 03/12/10 19/11/10
Avg. yield (pct) 5.281 4.813
Avg. price (pct) 95.116 95.359
Highest yield (pct) 5.400 4.950
Lowest yield (pct) 5.000 4.440
Tail 0.119 0.137
Total bids 1.253 bln 1.334 bln
Allotment 500 mln 750 mln
Bid-to-cover ratio 2.5 1.8
Outstanding after auction 1.366 bln 866 mln