In a meaningless "test" of investor appetite for Spain's Thursday issuance of 2, 3 and 5 years bonds, Spain today sold €3.04 billion in 12 and 18 month bills, well inside the LTRO maturity, and completely meaningless from a risk perspective - after all even Greece is issuing Bills. Yet for some reason the market which continues to be dumber by the day, somehow took the "successful" auction as an indication that there is actual demand for standalone Spanish subordinated debt. And what a 'success' it was: €2.4 billion in 12 month Bills were sold at 5.074%, the highest since at least 2003 and possibly on record. This is more than 2% greater than the same such auction at the end of May. In other words, Spain just locked in absolutely unsustainable 1 year rates. It also sold €639 million of 18 month paper at 5.107% compared to 3.302% less than a month ago. The good news: bids to cover for the two maturities, from 1.8 and 3.2, to 2.2 and 4.4 respectively. And of course they would: Spanish banks found what little LTRO cash they had lying around and in act of total desperation tried to do a carry trade whereby 3 year paper priced at 1% is used to buy 1 year paper yielding 5%.
So while Bill issuance is in no way a test for real Bond issues, here is a full list of upcoming Spanish bond auctions: good luck with them all. Should be rather interesting watching as each of these auctions prices at all time high yields:
- 21 June: Spain auction. Bonds.
- 26 June: Spain auction. Bills.
- 5 July: Spain auction. Bonds.
- 17 July: Spain auction. Bills.
- 24 July: Spain auction. Bills.
Reuters with a brief summary:
Spain's short-term borrowing costs rose to their highest level since 1997 in a debt sale on Tuesday as investors worried the country will soon be forced to ask for international aid.
The euro zone's fourth-largest economy has become the focus of the regional debt crisis, with the country struggling to overcome recession and a costly banking sector restructure.
Yields on Spanish 10-year bonds have been trading above 7 percent, a level seen as too pricey for shaky public finances in the medium term by creating a self-full filling spiral like ones that have forced other euro governments to seek help.
The rise in Spain's longer-term interest rates put the sale of 3 billion euros ($3.77 billion) of bills in the spotlight ahead of a bond auction on Thursday.
There was good demand and the government met its target amount but the yield on the 18-month paper was the highest since November while the 12-month bill sold with the highest rate since before the birth of the euro.
"The yields are over 5 percent in both lines which is back at the levels we saw in November 2011 when the market was in huge distress and the ECB was forced to intervene," Credit Agricole rate strategist Peter Chatwell said.
Borrowing costs fell sharply after the European Central Bank flooded the market with around 1 trillion euros in cheap credit through two long-term refinancing operations (LTROs), in December and February, but they have since leapt back up.
Spain is hoping the ECB will ride to its rescue again. Officials have repeatedly said the central bank needs to take action to stop the euro zone debt crisis from getting worse.
Also putting things into perspective was ING, which said that Spain may end up needing another €250 billion bailout when all is said and done. From BBG:
- A 3-yr bailout for Spain may be “too large” for the EFSF at €250b on top of €100b already pledged for banking system, ING strategist Alessandro Giansanti says in client note.
- EFSF has free lending capacity of EU251b; ESM will need to be activated
- Says Spanish government likely to need a bailout program to cover redemptions, budget deficit
- Sees continuing flattening of Spanish curve, with inversion in 10/30 spread
- SMP program may be restarted if Spanish 10-yr yields reach 7.50%; Sees only “short-term relief” and an increase in subordination risk
- BNP says impact of ECB on Spain could be “very material”
Finally, in what may be the most important news, the German ZER Survey of economic sentiment literally imploded, printing at -16.9 on expectations of a +2.3 print, and down from 10.8 previously. This was the fastest rate of collapse since 1998. From Reuters:
German analyst and investor sentiment fell in June at its fastest rate since October 1998, with the worsening of Spanish banking sector and uncertainty over Greek election outcome likely to blame for the drop, a survey showed on Tuesday. The Mannheim-based ZEW economic think tank's monthly poll of economic sentiment fell to -16.9 from 10.8 in May, way below the forecast in a Reuters poll of 42 analysts for a drop to 4.0. The euro slid against the dollar and European stocks also dropped after the much weaker-than-expected survey. "The financial market experts' expectations are a strong warning against a too optimistic assessment of Germany's economic perspectives in the remainder of this year," said ZEW President Wolfgang Franz. "The risks of a pronounced decline in economic activity in countries with close trade ties to Germany are very clear," said Franz. "In addition, there is a situation in the euro zone which continues to be precarious." "The outcome of the Greek vote is a short breathing space - just that, nothing more and nothing less," he added. The index was based on a survey of 274 analysts and investors and conducted between May 29 and June 18, ZEW said.
Well, at least Germany is Chile...