Don't look at 10Y Spanish bond yields; ignore Swiss 2Y rates dropping; it's all about the front-end of the Spanish yield curve - that's your tell that "everything's awesome." We even saw some proclaiming the 5Y Spain 'strength' as indicative that the market is 'buying it, and Draghi will deliver'. Problem is - he can't! Even if he announces a non-monetizing short-dated monetization plan, and gets it by his BuBa buddies - the market knows the problem: that without this 'temporary feature' becoming permanent (and therefore the ECB basically embarking on open-ended monetization - see Gold), the market expects Spain's short-dated cost-of-funding to more than double (to 6.5% from 3% currently) over the next three years. The steeper the curve, the more the ECB will have to buy and while thin illiquid bond markets manipulated by CB intervention are 'most' people's indicator, consider youth unemployment, capital outflows, and loan delinquencies before becoming euphoric.
The chart below shows the current Spain curve (orange) which indicates the term structure of interest rates (or cost of funding) for Spain issuing debt at varying maturities...
The other lines indicate what the 'market' expects (implies) that cost-of-funding to be in 1, 2, and 3 years from now... as is clear - the cost of funding soars! even at the front-end; this means implicitly that the ECB will need to work harder and harder to keep those rates down.
The trade, of course, in the short-term will be hedgies grabbing SGBs just outside of the ECB's mandate (if rumors are to be believed 3 years) and riding them into the 'buying range' - earning carry and then selling back to the ECB (cap gain) - this will work until (as always) it gets crowded (and will drag the curve lower we suspect which will be heralded as indicative of market support and belief) and then suddenly risk will want out in a hurry and unlike Corzine, they will suffer MtM losses and be squeezed - good for a trade maybe? but crowded and prone to illiquidity gaps - surely.