Well, it’s the only explanation we can come up with for this morning’s up-sized Spanish bond auction.
The government had been looking to sell up to €3.5bn of paper, but ended up knocking out almost €6bn.
RTRS – SPAIN 2020 BOND AVERAGE YIELD 5.201 PCT (VS 5.006 PCT AT SEPT AUCTION)
RTRS-RPT-SPAIN SELLS 2451 MLN EUROS OF 2016 BOND
RTRS-RPT-SPAIN SELLS 2177 MLN EUROS OF 2020 BOND
RTRS-RPT-SPAIN SELLS 1400 MLN EUROS OF 2021 BOND
SPAIN 2016 BOND BID-TO-COVER RATIO 2.0 (LAST AUCTION 2.8)
RTRS-RPT-SPAIN 2020 BOND BID-TO-COVER RATIO 1.5 (LAST AUCTION 2.0)
RTRS-RPT-SPAIN 2021 BOND BID-TO-COVER RATIO 2.2 (LAST AUCTION 1.8)
RTRS-RPT-SPAIN 2016 BOND AVERAGE YIELD 4.023 PCT (VS 5.276 PCT AT DEC. 1 AUCTION)
RTRS-RPT-SPAIN 2021 BOND AVERAGE YIELD 5.545 PCT (VS 5.433 PCT AT OCT AUCTION)
All of that paper can be used a collateral at next Tuesday’s three-year Longer Term Refinancing Operation.
The Corzine trade lives on.
Now, we had been sceptical Eurozone banks would put this trade on for the reasons outlined by John Hussman earlier this week.
We’ve seen some theories that Europe intends to address the problem through ECB lending to banks, taking distressed debt as collateral, with the banks turning around and buying more distressed debt.
Apart from the fact that this would be the sort of “legal trick” that the ECB would be unwilling to facilitate, this would imply an increase in bank leverage ratios far beyond the 30-40 multiples that already exist (which would be a disaster when tighter Basel III capital requirements kick in). In practice, depositors would flee, and you would end up with a European banking system where bank bondholders, not the ECB, would be subject to the losses, since the ECB’s collateral claims would be senior.
But they are.
President Sarkozy will be pleased.
Related links:
Sarkozy plan to prop up sovereigns is worrying – Short View
What is the difference between LOLR to banks and LOLR to governments? – Marginal Revolution
What’s possible under the new ECB policy - Modelled Behaviour
Keep on carrying on LTROs – FT Alphaville