Futures Tumble, Spreads At Record, Euro Drops On Another Awful Spanish Auction; More LCH Margin Hike Rumors

Today is a rerun of Tuesday when it was all about the horrible Spanish auction. Well, let's use a different adjective for what came out of Spain today: dreadful, atrocious, awful: all words used not by us but by Wall Street experts to describe what just happened (see below). To summarize: Spain sold €3.56 billion euros of a new ten-year benchmark bond, well below the €4 billion targeted. The average yield on the bond was 6.975 percent, the highest paid since 1997, and almost 2% higher compared to the 5.433% paid on October 20. The highest paid for a ten-year bond this year was on July 21 when it paid 5.986 percent. The bid-to-cover ratio, an indicator of investor demand, was 1.5: this compares to 1.76 a month ago, and 1.95 average of the last 6 10 year auctions. The result: Spain Bund spreads are at a record 499 and about to pass 500 bps: the level at which LCH hiked Italian bond margins, and is resulting in another round of rumor of an imminent Spanish bond margin hiked which in turn would lead to more selling of sovereign bonds both in Spain and everywhere else. The Spanish 2s10s has collapsed and is under triple digits for the first time in years: at this rate it may well invert in days. And speaking of everywhere else, French Bund spreads hit a record 202 earlier, a level which will be promptly taken out; Italian spread tightened modestly after the ECB stepped in with another brief intervention which will be promptly steamrolled. It has gotten so bad, the EFSF spread to Bunds also just hit an all time record - kiss the EFSF goodbye. Lastly, futures are at overnight lows or just over 1220. Looks like we will have another Risk Off day at least until Europe close.

Spanish Bund spread

Spanish 2s10s spread

French Bund spread

Italian Bund spread

EFSF Bund spread

Overnight stock futures:

Knee jerk reaction to overnight auctions via Reuters:


(On France):

"It is slightly disappointing but not as bad as Spain. They didn't manage to get the maximum amount they wanted and yields are obviously higher than last month, but remember maturities are much lower and investors are taking much less duration risk."

"It keeps contagion intact not just for the peripherals but also for the core countries and increases the pressure on the ECB to do something. Clearly at the moment the ECB is reluctant to do anything ... but if contagion seems to mount and we see a fully-fledged credit crunch in the euro land and a deep recession then I think the ECB needs to do something, even if it means just backstopping the EFSF, which seems a non-starter at the moment."


(On France):

"It wasn't such a bad auction, close to the maximum amount they wanted to do and bid/cover was OK. It was a good auction compared with what we saw in Spain and should offer some support for the short-end."


(On Spain):

"Very poor Spanish auction which will heighten concerns the door to Spain being able to sustainably finance itself is closing. This, in turn, stands to further expedite the convergence of Spanish yields with those of Italy as the country plays catch-up with its more troubled peer. Most troublesome, though, is the hugely elevated yield necessary to ensure even this lacklustre outcome."


"It's been a very weak auction... bid/cover was very low and even the tail was around 11 basis points between the average yield and the stop-out yield.

"It's the same situation as Italy where when you start to move above 7 percent you start to get to dangerous levels. But Spain, in terms of supply profile versus Italy, looks better because they don't have big redemptions until April."


"The bad part of it is that it's got a very big tail to it. The average yield is 6.975 but the stop rate is 7.088, that's an 11 bps tail ... that is not good.

"I appreciate markets are extraordinarily volatile so market makers will be putting in a lot of cheeky bids but they've got problems. I suppose the other aspect is who was buying other than domestic institutions -- be they banks, be they pension funds, be they insurance companies.

"It really just underscores what everyone has seen in the last couple of days. The euro zone has got to deliver something which is going to calm markets down and at the moment markets feel like they are being given no comfort whatsoever and this is symptomatic of that."


"It's a pretty awful auction. They didn't manage to sell the maximum target which shows lack of demand, yields are significantly higher than a month ago and the bid/cover ratio is weaker. It is a sign of the underlying negative sentiment towards the Spanish bonds. As a result, bond yields are rising towards new highs and it doesn't look like it is going to stop any time soon."

"It means investors in general are very cautious towards the peripheral countries. The widening trend persists in the peripheral and seems to be spreading towards the core countries."


"The result was dreadful. They didn't manage to raise the full amount and the bid/cover is really poor. The fiscal profiles of Spain and Italy are different but their yields seem to be aligning now. If the French auction today is poor we will really go into risk-off mode."

And some more commentary from Reuters:

Spain and France struggled with government bond auctions on Thursday, throwing into sharp relief the threat of larger euro zone economies succumbing to the debt crisis that began in Greece and is already lapping at Italy's shores.


Madrid was forced to pay the highest borrowing costs since 1997 at a sale of 10-year bonds, with yields a steepling 1.5 points above the average paid at similar tenders this year. The euro fell on the foreign exchanges in response.


Paris fared a little better, but again had to pay markedly more to shift nearly 7 billion euros of government paper. Fears that the euro zone's second largest economy is getting sucked into the maelstrom have taken the two-year debt crisis to a new level this week.


"The euro zone has got to deliver something which is going to calm markets down and at the moment markets feel like they are being given no comfort whatsoever," said Marc Ostwald, strategist at Monument Securities.

It is all up to the ECB once again:

France and Germany have stepped up their war of words over whether the ECB should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases have failed to calm markets.


Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France has urged stronger ECB action but Berlin continues to resist, saying European Union rules prohibit such action.


"If politicians think the ECB can solve the euro crisis, then they are mistaken," German Chancellor Angela Merkel said, adding that even if the ECB assumed a role as a lender of last resort, it would not solve the crisis.


Investors and euro zone officials hope that if Merkel and others find themselves staring into the abyss, the unthinkable will rapidly become thinkable.


"The Germans have made some remarkable changes to their position over the past few months, you have to give them credit for that, it just takes rather a long time. It's Chinese torture," one euro zone central banker told Reuters. "They are not drawing lines in the sand as clearly as they were."


"Clearly at the moment the ECB is reluctant to do anything."

And in the meantime, the world is burning.