A data point in the eurozone peripheral contagion story.
Out on Thursday — the results of a Spanish auction of 10- and 30-year bonds in the midst of heightened peripheral tension. The price? A hefty pick-up in yield.
Headlines via Reuters and Bloomberg:
BBG – SPAIN SELLS EU3.65 BILLION OF BONDS AT AUCTION
RTRS – 10YR YIELD OF 4.615 (4.144)
RTRS – 30YR YIELD OF 5.488 (5.077)
The €3.65bn sold was slightly less than the maximum target of €4bn — but it’s not a failed auction. There are still some people buying Spanish debt — though there’s also plenty in the market who still think it’s the Spanish themselves doing so. Aro Razafindrakola at Société Générale mentioned we might see “strong support from dealers, and there may also be domestic buying interest” in the auction.
A notion he supported (before Thursday’s auction) with this chart:
Of course, the ironic thing here is that the more debt Spain sells to domestics, the more the market — having become intimately-acquainted with that sovereign-financial feedback loop — starts to worry about its banking system.
On that note — Thursday’s FT article from FT Alphaville alum Sam Jones makes for rather interesting reading:
For some of the world’s biggest hedge funds, typically regarded as the savviest traders in the market, there is now one big question facing the eurozone: what is going to happen to Spain?
While Europe’s politicians are grappling with the crisis unravelling in Ireland, hedge fund managers are already turning their attention to the issue of how – and if – a peripheral crisis in Ireland could leap via Portugal and Spain to become a systemic crisis for the eurozone as a whole.
…
Selling short eurozone banks is again being seen as an attractive trade for hedge funds to execute, even with the European Central Bank standing by to prevent outright defaults. Some hedge funds believe it is actually ECB policy that has made the eurozone debt crisis so acute. As Citigroup analysts point out, the effect of the ECB’s liquidity operations, rolled out in 2008 to help mitigate tension in the eurozone banking system, has been to incentivise the area’s banks to load up on eurozone government debt.
Ay dios mío…
Related links:
Spain’s phantom securities – mas phantasmico – FT Alphaville
Bias in bonds - FT Alphaville
The tipping point for Europe’s banks - FT Alphaville