Spain did everything they could do to make sure this auction went well. The recent tightening in their fixed income market has all been about investor positioning. Eventually the market will have to return to Spanish fundamentals, and they themselves are not that good. Concerns over Spain remains the same for most other peripheral economies. Are the countries capable of carrying out further austerity measures without choking any of their own economies into submission? What about the domestic banks who remain highly leveraged, are they still vulnerable to another blowout in peripheral debt markets?
This morningâ€™s results, at first glance, are not all that bad. The Spanish treasury was able to sell more of the benchmark 10-year product than the short 2â€™s. This in itself is a small win. A feature it seems this year, is that Spain has a tendency to reduce the average duration of borrowing. If all they rely on doing is selling copious amounts of short-dated bonds they are creating themselves a refinancing problem at a time when their overall debt levels are rising. So spreading it out the curve is a good thing. The treasury achieved its target, although it was a modest one. The bid-to-cover ratios both in the 2â€™s and 10â€™s were decent, but the problem, which is not new, is that yields are clearly high (10â€™s at auction +5.743%, now +5.91% up +1.51%). The sale was helped by the small target size and by the fact that +EUR15b of coupon and redemption payments are due at the end of April. Also aiding, there has been a shortage of both maturities in the secured lending market.
In hindsight, the Spanish auction was probably never going to unsettle the market, because of its size, it is too small. The back up in peripheral yields this week just reaffirms that the ECBâ€™s LTRO merely provided liquidity and not a solution to the regional debt crisis. Obviously the market expects Draghi and company to be there if or when spreads do balloon. The Spanish story, not unfamiliar to the region, is one of fiscal position and growth. Until investors are convinced that the government is implementing the medium-term fiscal consolidation program, investors are going to worry about the trajectory of the debt-to-GDP ratio. The market risk is that any fall in yields will be temporary until the credibility of the Spanish government improves.
So far this morning, the EUR has seen a small relief rally, trading at the top of its range heading into North America. The dynamics have not changed because of two small issues. The technicals indicate that the bearish bias remains even as we trade north of Mondays holds (1.2995). Overall, prices have traded tightly all week, with the charts remaining flat ahead of overbought levels. The chartists continue to eye yesterdayâ€™s low as their immediate objective (1.3058).
Where is the momentum going to come in this apathetic market? The US is expecting to see the Philly Fed rise (13), and jobless claims (+380k) and existing home sales to remain flat (+4.6m). Itâ€™s difficult to see much enthusiasm to come from these indicators. We need Sarkozy to offer us some more public opinion gems. It has been a day without one, too long!
Spainâ€™s EUR White Knight
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