No, really there is.
Via Reuters on Thursday.
RTRS-SPAIN 2015 BOND AVERAGE YIELD 5.187 PCT (LAST AUCTION 3.639 PCT)
RTRS-SPAIN 2016 BOND AVERAGE YIELD 5.276 PCT
RTRS-SPAIN 2017 BOND AVERAGE YIELD 5.544 PCT (LAST AUCTION 4.782 PCT)
RTRS-SPAIN 2015 BOND BID-TO-COVER RATIO 2.7 (LAST AUCTION 2.1)
RTRS-SPAIN 2016 BOND BID-TO-COVER RATIO 2.8
RTRS-SPAIN 2017 BOND BID-TO-COVER RATIO 2.7 (LAST AUCTION 1.8)
Now, for us the most interesting thing is demand, or the bid-to-cover ratios, not the yields, which are approaching unsustainable (but we knew that anyway).
Increasingly it looks demand at these auctions is strong because Europe’s banks want something cheap (not expensive like Bunds) to pawn at the ECB.
Or as we put it earlier this week:
The ECB’s less fussy nature when it comes to the type of collateral it accepts makes it, de facto, the dumping ground for all collateral that the public market has deemed unacceptable and is no longer prepared to fund against.
In many ways, therefore, if you are going to fund at the ECB, it does make sense to get your hands on the cheaper stuff.
It’s one possible explanation why Italian bond auctions (and other distressed bond markets) have always been well covered despite notching up record-high bond yields.
You might call it ‘The Distressed Funder’s Dilemma‘, albeit with a cooperation twist:
- We all want cheap bonds to use at the ECB.
- We only want them if they are cheap, because otherwise it’s not cost effective to use them at the ECB.
- We had all better bid at a rate which makes accessing ECB liquidity worthwhile.
Sure it’s conspiratorial, but can you think of a better explanation? If so, leave your thoughts below.
Meanwhile in the market, Spanish 10-year benchmark yields have rallied hard post auction.
Update (11:23am London time):
RTRS-FRANCE SELLS APPROX €4.35B VS. €3.0-4.5B INDICATED RANGE IN 2017, 2021, 2026 AND 2041 BONDS
RTRS-Sells €595M in 3.75 Apr 2017 Oats; Avg Yield 2.42% v 2.34% prior; BTC: 4.40x v 1.72x prior
RTRS-Sells €1.571B in 3.25% Oct 2021 Oats; Avg Yield 3.18% v 3.25% prior; BTC: 3.05x v 3.25x prior
RTRS-Sells €1.1B in 3.50% Apr 2026 Oats; Avg Yield 3.65% v 3.77% prior; BTC: 3.24x v 2.60x prior
RTRS-Sells €1.08B in 4.50% Apr 2041 Oats; Avg Yield 3.94% v % prior; BTC: 2.26x v 2.22x prior
From Knight Capital:
- Yet more evidence of the massive demand for collateral to pawn off to the ECB. No point in extending the analysis beyond that point – because it’s true.
- Trying to do ANY sort of fundamental analysis in this market is like bringing a #2 pencil to a gunfight.
However, it’s worth saying that the French auction was much smaller than normal so the high level of demand should be viewed in that context.
Related link:
The decline and inversion of Italian bonds – FT Alphaville