What goes down, must shoot right back up. In this case we are talking about Spanish bond yields of course, which have yoyoed from a record 7.3% two weeks ago, back down to 6.3% last week, and right back up over 7% as of this morning. While the hope last week was that since the ECB is expanding its collateral it means an LTRO3 is on the way, the market promptly realized (even before LTRO3 was launched), that such a step means that Europe has run out of actual assets, and at this point is merely diluting the taxpayer collateral base. The result is that Spain is right back in purgatory where talk is cheap and unless Europe comes up with something concrete, purgatory will promptly be upgraded to the 8th circle of hell.
Elsewhere Italy was on the verge of joining Spain too after both its 5 and 10 Year bonds were trading above 6% minutes before a major 5 and 10 Year bond auction. However, the fact that the bond auction was not an outright failure managed to get yields down to a more modest reading.
Italy paid 5.84% to borrow €2.5 billion (same as the target) for five years, compared with 5.66% at a late-May sale and a 4.58 percent average for this year. The yield at auction on the 10-year bond rose to 6.19%, compared to 6.03% a month ago, and a 2012 average of 5.66 percent. Italy raised €2.92 billion in 10 Year paper just shy of the €3 billion expected. The five-year BTC was 1.54, above this year's average of 1.46. However, the BTC for the 10-year bond was 1.28, well lower than the 2012 average of 1.65.
In other words, while the kneejerk reaction has been one of brief relief, expect Italian yields to all balloon well north of 6% in the coming hours as the Eurozone summit starting in hours is a complete disappointment.
Some perspectives on the bond auction:
NICK STAMENKOVIC, BOND STRATEGIST, RIA CAPITAL MARKETS, EDINBURGH
"The auction was slightly disappointing. They failed to reach the (maximum) target, demand was reasonable, probably driven by domestic investors. The key thing is that yields continue to rise, which shows the hurdle that funding is moving into ever higher territory, compounding the fiscal problems facing Italy.
"It is unlikely to help confidence as investors nervously await the outcome of the EU summit."
BIAGIO LAPOLLA, STRATEGIST, RBS, LONDON
"All in all the auctions went quite well, particularly for the five-year bond, which has seen a more solid demand that was confirmed by post-auction market trades. Certainly the 'concession' we have seen pre-auction helped support demand for both bonds. Clearly uncertainty remains as we wait for what happens at the EU summit"
LUCA JELLINEK, HEAD, EUROPEAN RATES STRATEGY, CREDIT AGRICOLE, LONDON
"Today's auction has certainly been a good placement. The five-year BTP and in part also the 10-year BTP have been placed above market levels. After some sale orders on these securities at the start of the session, we have seen consistent orders just before the closure of the auction."
ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDAM
"The two bonds have been placed at better levels than the market, both in terms of yield and price. Demand was good, particularly for the five-year BTP, which went very well. Prices fell down over the last few weeks, consequently the bonds have become attractive from a speculative point of view. In any case, despite rates above 6 percent, Italy is still able to place its bonds"
MATTEO REGESTA, RATE STRATEGIST, BNP PARIBAS, LONDON
"It's not impressive but it does not deliver any particular message to the market. It's broadly in line with what we were expecting. The market was pricing in a concession versus the previous auction but given market levels we can see there was demand evidenced by some overbidding."
LYN GRAHAM-TAYLOR, STRATEGIST, RABOBANK, LONDON
"Given the support given to the auctions by 18.1 billion euros of redemptions and coupons that are due on Monday the bid/cover on the 10-year bond in particular is quite low. If the result of the EU summit is viewed negatively by the market then it is likely that the Spain-Italy spread will narrow due to the political pressure that Monti is under at home to return with at least some concession. However, if there is any signal from the summit that the ESM will start to be used imminently to purchase Italian and Spanish sovereign debt then this could also see the spread narrow as Spain is likely to benefit from such purchases more than Italy as euro zone yields may start to converge."