Spain Sells 9.98 Billion Euros of Notes, Twice Maximum Target
Comment of the Day

January 12 2012

Commentary by Eoin Treacy

Spain Sells 9.98 Billion Euros of Notes, Twice Maximum Target

This note by Emma Ross-Thomas for Bloomberg may be of interest to subscribers. Here it is in full:
Spain sold 9.98 billion euros of bonds maturing in 2015 and 2016, including a new three-year benchmark security, twice the maximum target of 5 billion euros set for the sale.

Demand for the new three-year benchmark bond was 1.8 times the amount sold, compared with a bid-to-cover of 2.7 the last time securities of a similar maturity were sold on Dec. 1, the Bank of Spain said.

The yield on the new benchmark, which matures in July 2015, was 3.384 percent, compared with 5.187 percent when Spain sold notes maturing in April 2015 at an auction in December.

Eoin Treacy's view The Eurozone's equivalent of the TED spread pulled back from approximately 150 basis points to 100 basis points following the sale of €450 billion in 3-year notes by the ECB in late December. So far this reaction is about the same size as that posted last summer. A decline below 100 basis points, held for more than a couple of weeks, would break the progression of higher reaction lows and improve the perception that the European banking sector is capable of functioning normally. Today's successful auction of Spanish bonds also helped to improve sentiment towards the region.

Yield curve spreads (10-year – 2-year yields) for various countries offer an insight into whether monetary policy is a tailwind or a headwind. The German spread peaked in May 2010 and while lower, it has held the majority of its advance. Nevertheless, a sustained move above 200 basis points would be required to question medium-term scope for continued tightening.

The Greek spread continues to deteriorate and is currently in the region of -13,200 basis points, suggesting the potential for a deeper haircut on Greek debt continues to be discounted.

The Greek situation stands in stark contrast to the improvement seen in other European debt markets. Irish spreads have rebounded from -800 basis points to a mildly positive position. Portuguese, Spanish, Italian, Belgian and French spreads have all rebounded emphatically over the last two weeks. This suggests greater intervention by the ECB and / or a more positive attitude towards the ability of the Eurozone to deal with its problems.

Late last year, sentiment towards the Eurozone was particularly bearish. Since then, the ECB has taken a distinctly more active attitude to finding a solution. The most likely scenario remains a Greek default where creditors accept a deeper haircut than initially envisioned. Subsequently we can expect every attempt to be made to minimise contagion. The above spreads suggest this policy is already in place and so far successful

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