As Spanish, Italian Treasury Auctions Come In Weaker Than Expected, Nerves Return

While pundits are still contemplating yesterday's CME move to hike collateral haircuts on US Treasurys (absolutely nothing more then merely more posturing) today's European auction results indicate that the time to expand the EFSF to the €1.5 trillion threshold may be approaching faster than anyone expected. In Spain, the Treasury sold 750 million euros of 3-month bills at an average yield of 1.899 percent compared to 1.568 percent at the previous auction and at a bid-to-cover ratio of 6.3 after 9.5 in June. Spain also sold 2.14 billion euros of 6-month bills, with the average yield rising to 2.519 percent, the highest since Dec. 2010, from 1.776 percent in June, while the offer was 2.2 times subscribed after 3.8 times at the last auction. In other words: far higher interest and far lower demand than the last such sale in June. As Reuters cites, "The most important point again is the fact that relative to the last auction yields are much, much higher ... It's not a good situation to be in," strategist at Monument Securities Marc Ostwald said. "It shows we may have had some relief last week but that relief has proven to be rather short-lived." We wonder just how much of these auctions were allocated to the EFSF monetization mechanism and/or Asian proxies that know they can promptly use it for precisely such purposes. Elsewhere Italy sold €10 billion in 6 month Bills and 2 year notes, and just like in Spain, both saw their respective yields rising and investor demand falling: 6-mo auc avg yld 2.269% vs 1.988%, bid/cover 1.56 vs 1.72, 2-yr auc avg yld 4.038% vs 3.219%, bid/cover 1.66 vs 1.87. End result of today's auctions: both Spanish and Italian Bund spreads jump to day wides as the IBEX is now underperforming on concerns Europe's second bailout bought less than a week of calm.

More from Reuters:

Spain paid euro-era record high rates to sell two long-term bonds on Thursday before EU leaders met on Greece last week.


Economists say Spain is unlikely to meet its growth forecast of 1.3 percent in 2011, casting doubt over the ruling Socialists' ability to cut the deficit to a planned 6 percent of gross domestic product before the end of the year.


The premium investors demand to hold Spanish over German debt stood at 316 basis points on Tuesday before the auction, though this rose to around 329 bps shortly after. The Spanish-German spread hit euro-era high of around 370 bps on July 18.


One rate strategist said yields would eventually fall back as the Greek plan and changes to the European Union rescue fund are implemented.


"It takes time to implement (the Greek bailout plan), and within this period the market will try to collect some extra basis points, but as we approach the operative phase, these rates will have to decrease," rate strategist at BNP Paribas, Matteo Regesta said.


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