The Overnight pEURonoia Is Back - Previewing This Week's Extensive European Bond Auctions

European bond markets appear poised on the edge of the latest precipice as economic data this morning has confirmed once again that all the ECB's $1.3 trillion liquidity injection did was mask the underlying solvency issues for less than 4 months. Net result: more liquidity injections imminent (and with $2.5 trillion in asset sales and deleveraging still pending, we should probably bold and underling more). Yet what some are forgetting is that European banks would want nothing more than getting Spanish bonds back to 7.50%, the bogey which JPM defined as the level at which the NEW LTRO will be unleashed, standards of living be damned. The junkies need their fix and will do anything to get it, even crashing sovereign bond markets in the process. They may get their wish sooner than most expect: after all, this week is chock full of bond auctions in the core and periphery, where just one failure will make every forced buyer into a forced seller, as creative destruction will be the only thing to force the ECB's hand into injecting another several hundred billion in stock steroids, now that the Fed is still in its pre-presidential election quiet period. 

Marc Ostwald of Monument, via Bloomberg, summarizes the pitfalls in the next 168 hours:

  • Italian auctions this week will require ‘hefty concessions’ while the new 30-yr bund auction will need substantial foreign demand given its unappetitizing yield, Marc Ostwald, strategist at Monument Securities, writes in note.
  • Cites weekend collapse in Netherlands budget talks, highly inconclusive first round of French presidential elections and sluggish PMIs out of China
  • French election results highlight an extension of the Balkanization of western Europe and deep-seated disenhancement with modern politicians
  • A grand coalition of CDU and SPD is high probability in Germany’s 2013 federal elections which would push the euro zone closer to complete disintegration; increasingly unbridgeable gap between German and French visions of the region
  • Italy’s auctions of bills, 2-yr CTZ/BTPei and BTP/CCTs this wk will require hefty concession
  • New 30-yr bund auction will need substantial foreign demand to be successful as there is little natural/structural demand domestically while current 30-yr yield of 2.38% is wholly unappetitizing

And visually: