Thursday’s (Spanish) risk factor [Updated] | FT Alphaville

Thursday’s (Spanish) risk factor [Updated]

Up today: The auction of €4bn worth of 10-year Spanish government bonds.

A(nother) Spanish bond auction litmus test.

But Thursday’s auction could well be different. Markets are ticked-off at regulators like BaFin, to put it politely, and potentially pushing for the European Central Bank to purchase more government debt.

The ECB said on Monday that it had bought €16.5bn worth of eurozone bonds. That’s a relatively tiny number, and one that might have to increase dramatically to satisfy risk-averse markets.

Thursday’s Spanish auction also comes hot on the heels of a near-miss on Tuesday with the sale of €6.44bn of one-year and 18-month bills. Spain’s debt managers had originally intended to sell €8bn worth of debt, but cut that back by €1.56bn. Yields and bid-to-cover ratios looked like this:

And so, to Thursday’s auction. The below commentary is from 4Cast:

Nothing would precipitate events better than a failed peripheral bond sale. And Spain finds itself right in the eye of the storm on Thursday as it calls on the primary market with a EUR 2.5-3.5bn offering on its 10y on-the-run. It is no secret that the Spanish government is facing increasingly challenging conditions to place its debt. The 12-18m T-bill auction on 18-May showed lower levels of demand vs. the historical average, as well as a significant rise in yields. If this was the case for very short-dated paper, then one has to assume that the situation will be even more challenging when it comes to placing a long-dated instrument such as the 4% Apr-20.

Barclays Capital, however, offer up a different opinion:

Supply will be to the fore once again today when Spain auctions its 10y bond, followed by France, which will issue a new 2y BTAN alongside taps of 4y and 5y bonds. Most notable will be the Spanish auction, which comes hard on the heels of a lacklustre Portuguese 9m T-bill yesterday, which tailed c.54bp, and as such represents an opportunity to gauge investor appetite for peripheral bonds. We feel, however, that the recent underperformance of Spain versus other peripherals (which have benefitted more from central bank buying), and a substantial short base in Spanish bonds may combine with a traditional strong domestic bid to result in a more positive result than some may fear and this could prove calming for markets.

The Spanish bond auction starts at 9am London time, with the results due a bit after.

Update: Results of the auction are already coming in.

And they include a decent bid-to-cover ratio but a much higher yield:

Related links:
Auction of Spanish debt close to failure – FT
A Spanish bond auction litmus test – FT Alphaville
All eyes on Italy – FT Alphaville