Overnight Sentiment: Spain Sells Bonds As Redemptions Loom

For the third day in a row, there is little to write home about from the overnight action. The EURUSD has been choppy following an MNI report about comments from EU officials that suggested Germany wants to delay the Troika decision on a €31.5 billion payment to Greece until after the November 12 Eurozone finmin meeting, no doubt predicated by the already discussed willingness by Europe to not rock the boat before Obama is reelected, still leaving the question hanging: just why is an entire insolvent continent so hung up on a US presidential decision. The main FX market focus is on the European Central Bank rate decision, due at 1145GMT. The ECB is widely expected to leave rates on hold just as the BOE did moments ago (it needs to hurry up if it wants to win the race to debase) although in the New Normal one can't be sure of anything. In other news Spain auctioned off a much needed €3.99 billion in various short-term bonds, the bulk of which fell under the LTRO maturity umbrella, but which was successful nonetheless if with modestly weaker short-end results, and an overall bitter aftertaste as seen by the resumption in Spanish 10 year widening, as the entire market, not to mention Draghi, is starting to get very impatient with Rajoy, who is now even getting urged by Catalonia's Arturo Mas to finally bite the bullet and demand a bailout (and resign shortly thereafter): "A bailout is inevitable; therefore the best thing to do is to make the decision without delay,” Mas said. “Spain has the potential to overcome the situation, but it will need assistance for some time." Recall that Spain's cash needs in October surge so every single successful euro raised is more than critical.

On the moves of the EURUSD via MNI:

Opened in early Europe at $1.2923. Recovery attempts around the NY close continued into Asia, extending to $1.2924 before getting knocked back to $1.2910, but the dip quickly attracted fresh demand that saw rate edging toward resistance in the $1.2930/40 area. The move up seen driven via the crosses, demand in euro-Aussie and euro-yen the main pairs noted. The move up in the euro seen despite reports that the Troika is demanding that Greece increases the amount of spending cuts in its austerity program. Euro cross demand lifted the rate to $1.2954 in early Europe as the risk rally continued with a break of $1.3000 the target. Comments from EU officials that suggested Germany wants to delay the decision on a Greek payment until November weighed on markets and the rate slipped to $1.2930. Spanish/French auctions that didn't disappoint gave the pair a brief lift, before settling around $1.2935 ahead of NY. Focus today on the ECB rate decision at 1145GMT ahead of the press conference at 1230GMT. No change in rates is widely expected.

More details on the Spanish Auction via Reuters:

Spain sold 4 billion euros of shorter-dated government bonds on Thursday, paying slightly more to borrow over three years than last month but drawing strong interest from investors. Investors bid for 2.0 times the amount on offer of a three-year bond, compared with 1.6 times at the previous auction but well down from a 2012 average at three-year bond sales of 2.9 times.

The average yield on the paper was 3.956 percent versus an average this year of 3.825 percent.

A five-year bond drew bids for 2.5 times the amount sold, compared with 2.1 times when the bond was last opened in July. Yields fell to 4.766 percent from 6.46 percent at that sale.



"Some concession has been given both in the past few days and earlier this morning, supporting demand for all lines at today's auction. In particular, the 2015 (bond) offered a very attractive yield pick-up versus the Spanish curve as it is just at the beginning of its tapping cycle."


"One thing with the Spanish auction is that the two shorter ones fall within the ECB maturity limit if Spain does apply for support and the bulk of the issuance has been done in those maturities.

"They (sold) at the top-end of what they were looking to sell away which I think is a good thing at the moment. It's a bit of a concern the focus of issuance in the front-end, you will have massive roll-over in a couple of years time.

"I don't think there is anything in those numbers that would make me preclude a bailout in the relatively short-term."


"A positive result in terms of the amount taken down and the reasonable cover ratios seen here. The 2.5 cover on the five-year provides some reassurance given this is only bond here that will not currently be eligible for the ECB's OMT.

"Unsurprisingly, yields are much lower relative to the taps preceding Draghi's pledge to do whatever is necessary at end-July. The modest increase in accepted yields on the three-year, tapped more recently on Sept. 20, perhaps hints at a slow grind higher in yields as Spain's ongoing prevarication on the bailout front erodes the 'Draghi put'.

"All in all, in line with expectations given the prospect of ECB support was always going to provide a conducive backdrop to this short-dated issuance."


"They managed to sell just shy of the 4 billion euros targeted, demand was pretty decent, yields were a tad higher than a month ago, but overall it was pretty well received, which is not a surprise given the backstop provided by the ECB."

"There is a natural demand given the expectation that at some point Spain will request a sovereign bailout and the ECB ... will buy short-dated bonds. The test going forward is going to be the next 10-year auction."


"When you look at the cut-off rate relative to the average price, you can see that the bidding has been pretty scrappy.

"But they have got it away. There was a big concession made ahead of the sale and it basically has been sold at the sort of levels which the market got to just before 9:30. I don't think there's going to be a very large rally... as a result because it's an OK auction but it's missing a lot in translation."


"The bonds cheapened before the auction and that helped the outcome. The fact that they sold the maximum amount with strong bid/covers and at a better price to what was prevailing in the secondary market makes this a strong auction... The 3-year especially was supported because of expectations of ECB bond buying. There's a huge redemption at the end of October and that could have some positive impact, assuming domestic rollover."


"The quantity of the bids was OK, decent even, but it is the level of the bids on the off-the-run paper which has left the market a bit disappointed. Given the uncertainty surrounding the timing of Spain asking for aid, this should not be too much of a surprise."


"It wasn't bad at all. There was strong demand and immediately afterwards the spread fell slightly to 438 basis points from 440 basis points."


"The only thing that turned out a bit worse than expected were the yields, as they were higher for the Treasury than on the secondary market. However, the level of demand was good."

"It's true that the market has some doubts over the timing of the Spanish rescue."

In other media news:

EUROPE: Spain has been warned by officials that "AAA" state governments will demand stringent conditions for any bailout, the Telegraph warns, as both parliaments and electorates become more skeptical over bailout deals. The paper says Spain PM Rajoy is delaying asking for a bailout until any such terms are clearer.

GREECE: The Troika is set to ask the Greek government to find an additional E1 bn in spending cuts for 2013 before agreeing to the next round of fund disbursement, eKathimerini reports.


And a comprehensive overview of overnight developments via DB's Jim Reid:

Yesterday’s commentary on Spain was as inconclusive as ever. In an interview with the Nikkei, Schauble hinted that Germany was open to a Spanish request for a bailout, in contrast to reports earlier in the week that Merkel was hesitant to put a bailout to the Bundestag. Catalonian President Artur Mas, went even further suggesting that a Spanish bailout is "inevitable", while Finnish PM Katainen was quoted as saying that a full bailout was "unlikely" (AFP). The IMF's Christine Lagarde said that "If Spain wants (a bailout), we could help in diverse ways, for example by simply auditing and monitoring reforms negotiated with its European partners without the IMF participating in financing…But we could also play a role in financing". Staying in Spain, the economy minister divulged further details on Spain’s bad bank. The bad bank will be 90% financed with senior debt from the government's bank bailout fund, FROB. Equity funding of 10% will be majority provided by private investors who will own 55% of the bad bank. The government will hold the balance (45%) of  equity, probably in an effort to avoid consolidating the bad bank's debts (Reuters). De Guindos added that a detailed bank recap plan will be presented in October and the bad bank will be operational by the start of December. According to Reuters, the economy minister will meet with private investors in London today to promote investments in the bad bank.

On the topic of bank recaps, EC President Barroso commented that leaders at the EU summit in June had clearly agreed that the ESM should be allowed to  recapitalise banks directly. Importantly however, he remained uncommitted on whether the June agreement also included “legacy assets” saying that he did not want to discuss “semantics about the interpretation” of the agreement (Irish Times).

While Spain continues to mull the pros and cons of a bailout, Cypriot' President Christofias was somewhat more unambiguous, stating that he cannot accept Troika draft recommendations on Cyprus’ bailout terms. In particular he opposed the sell-off of stateowned enterprises and the freezing of wages (presently inflation-linked). In Portugal, the largest umbrella union announced a general strike for November 14th to protest against the government’s recent tax hike proposals. Though on a more positive note, the Portuguese debt agency IGCP bought EUR3.76bn of bonds due next year in exchange for  securities due in 2015 as the country accelerates plans to return to international credit markets (Bloomberg).

European Council President Van Rompuy outlined an ambitious agenda for the EU leaders summit on Oct 18-19th which includes central banking  supervision, a centralised euro zone budget, a single bank resolution fund, direct recapitalisation of banks from rescue funds and stricter fiscal oversight.  Finally, a poll showed that Francois Hollande’s rating has fallen to 41% (from 50% in September) in the first gauge of opinion following last week’s 2013 French budget bill.

Overnight markets are trading firmer with the Hang Seng and KOSPI up 0.3% and 0.1% respectively as we type. Following yesterday’s surprisingly large trade deficit, data flow in Australia continues to be on the softer side. Australian retail sales were +0.2% mom in August (vs +0.4% expected) with our Australian economists noting a return to its previous soft trend following volatility in the preceding two months. The AUDUSD cross sold off 0.4% following the data, but has managed to recover all of its losses. For the record, we expect the RBA to follow up this month’s rate cut with an additional 25bps this year and 50bps of easing next year. The Nikkei is 1.2% higher this morning, with both sides of Japanese politics calling for further easing ahead of the BoJ’s policy announcement tomorrow.

Turning to the day ahead, the BoE’s rate decision is due at midday with a Bloomberg poll showing that economists unanimously expect the BoE to keep current policy settings unchanged. Data flow in Europe will remain fairly light. In the US, the focus will be on the Fed minutes. In terms of data, we get initial jobless claims and factory orders for August. However, Draghi’s press conference at 1:30pm will be the main focus.


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