Europe Again In The Spotlight After Latest Weak Spanish Auction, Sends Futures Much Lower

While the key topic this morning is the BOJ's intervention in the JPY, which had been selling the Japanese currency virtually all night and was rumored to be constantly on the USDJPY bid (a move which is doomed to failure just like all such previous attempt by a central planner to take on the Bernank), the primary reason why futures are largely in the red is due to yet another very weak Spanish auction which sold €3.3 billion in 2014 and 2015 bonds at the highest yield since 2000. This is despite the rumored resumption of ECB bond buying as was reported by the Telegraph previously, a development which would mean that monetization via currency devaluation has commenced indirectly in Switzerland, Japan and the Eurozone, (soon the UK) in advance of the Fed's own third QE round. As for the Spanish bond auction specifics, the Treasury was expected to sell between €2.5 and €3.5 billion, ending with an amount of €1.111 billion of 4.4% bonds due 2015, a yield of 4.984% and a 2.4 Bid To Cover, and €2.2 billion in bonds due 2014 at a just modestly lower yield of 4.813% (compared to 4.291% in July) - the Bid To Cover was also a very weak 2.14. Once again, all these results assumed the ECB would backstop futures secondary market purchases: should this be proven to be a bluff, look for Spain to follow Italy in a self-imposed bond market exile.

As for the immediate aftermath, it was quite ugly: Spain’s 10-year spread over bunds widened slightly after the auction drew lower bid/cover ratio, higher yields and less-than-targeted issue. Spain 10 year spread over bunds widened back to 368bps from 361bps earlier this morning; still below yesterday’s record high of 385bps. Yield on the 10 year note fell 14bps to 6.11%; hit 6.04% earlier. Yield on Spain’s 4 year bond due January 2015 fell 11bps to 5.09% on the day, a second day of decline.

Reuters has much more:

Spain paid sharply higher yields to sell 3.3 billion euros ($4.70 billion) of bonds on Thursday after a renewed market attack that has driven its costs of borrowing close to unsustainable levels.


The Treasury sold 2.2 billion euros of a 2014 bond, and 1.1 billion euros of a 2015 bond, bringing the total sale close to the top end of the Treasury's 2.5-3.5 billion euro target range.


Spanish yields have soared to their highest level since the inception of the euro as a still-deepening debt crisis threatened to swallow the larger economies of Italy and Spain.


Average yields for both Spanish issues were the highest at a Treasury sale of such maturities since 2000.


Dealers said that demand had been helped by market talk the European Central Bank would re-start its bond buying programme to aid the struggling peripheries.


"The fact they are short-dated bonds, and speculation the ECB will buy bonds again has seen aggressive buying by primary dealers," said an official from one major bank in London.


"The question is what happens now -- if the ECB does not buy bonds then there could be a big sell-off in the periphery."


He also said that Chinese accounts had been buying debt issued by the euro zone's highly-indebted periphery in recent weeks.

The bond sales were the first since Prime Minister Jose Luis Rodriguez Zapatero called early elections last week, adding to uncertainties ahead for Spain as it battles to generate more economic growth and escape the crisis.


Zapatero delayed holidays this week to discuss ways out of the turmoil with ministers and will stay in Madrid on Thursday, his 51st birthday.


The average yield on the 2014 bond was 4.813 percent, up on the 4.037 percent the last time it was sold on June 2. The average yield on the 2015 bond was 4.984 percent. The bond was last sold in 2009.


The yields were both below the 5 percent mark, crossed on Wednesday on the secondary market.


The yield on the benchmark ten-year bond was around 6 percent on Thursday, close to euro-era record highs.


Analysts remain concerned government financing is unsustainable over a long period at these levels and should they rise above 7 percent would eventually force Spain to call for a bailout following Portugal and Ireland when they paid similar rates.

Next up: the market looks at the ECB, and specifically to Trichet's languages as to when the grumpy old man was admit defeat and start lowering rates... Just like the last time he launched a horribly misguided tightening campaign. And then, of course, we have the NFP tomorrow.