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Mixed Results As Spain Sells More Bonds Than Expected, But Pays Up As Yields Again Spike - Analyst View

Zero Hedge
Thursday, 3 May 2012

Traders were watching Spain cautiously this morning which at around 4 am Eastern sold €2.52 billion of three- and five-year government bonds, in its first bond auction since Standard & Poor's cut its sovereign rating by two notches last week. The results were mixed because while more than the maximum range of €2.5 billion was sold (on solid total demand of €8.07 billion) or €2.52 billion, Spain paid up for the privilege, with yields rising across the board, reaching just why of 5% for the 2017 bonds and more importantly pricing with tails to secondary market prices, confirming that the trend in rising yields at primary issuance is very much unsustainable. This in turn caused the EURUSD to get spooked and slide to overnight lows, a move not mimicked by broader equity futures which this morning are again in a world of their own, and now simply await to see if the Initial Claims number later will be far worse than expected in order to soar.

Th Spanish auction details were as follows:
· €979 MM in 4% 2015 bonds sold at 4.037% yield, vs 2.89% yield last; bid to cover 2.88 vs 2.41 previously· €765.4MM in 3.8% 2017 bonds sold at 4.752% yield, last was 4.319%, bid to cover 3.69 vs 2.46 previously· €773 MM in 5.5% 2017 bonds sold at 4.960% yield; bid to cover was 3.14

Elsewhere, France also sold €7.43 billion of bond maturing in 2017, 2021, 2022 and 2025 in a rather uneventful auction, which will get far more eventful once Hollande is officially president in about 4 days.

Below is the analyst instantview via Reuters from the sellside to both the Italian and French auctions:


"It looks like some of the uncertainty related to the presidential election hasn't weighed too much, they managed to get the full amount away with lower yields and decent bid/cover."

"There has been a closing of the gap in terms of the differences between Hollande and the prevailing wisdom in Europe. Hollande has softened his stance a bit on the fiscal compact and explained that he didn't want to renegotiate it completely, he just wanted to add some pro-growth measures.

"Draghi and Merkel have sounded relatively flexible on that recently. There's a realisation that pure austerity alone may not work. The conflict that the market had perceived to happen if Hollande came to power may not be as insurmountable as first thought."

(On France):


"Solid as normal, tight tails, decent yields. What political risks?"


(On France):

"The amount is at the top of the target range and all lines were well covered. Most of the supply was concentrated at the 10-year segment...Note that the 10-year benchmark looked cheap versus previous rolls ahead of today's auction, trading around 5 basis points cheaper than the previous 10-year benchmark.

"The three off-the-run OATS were also well covered today. The re-opening and good cover is a clear sign that dealers still have shorts open on the line. Despite the political uncertainties, today's OATs auction was well bid. The relatively modest amount on offer was a supportive factor."

(All comments below on Spain):


"It's pretty mixed. The most positive points are the Spanish authorities managed to raise the maximum 2.5 billion amount and bid/covers were pretty healthy, suggesting demand was there. But yields were higher than a month ago, which clearly shows Spain is able to get its auctions away but investors are demanding a higher risk premium to do so. It's a pretty mixed backdrop, hence ongoing worries about the fiscal position of Spain will persist but I don't think it's a sufficiently weak auction to push Bund yields to new lows."


"Overall it was quite good, they sold the full amount, bid/cover was quite high, it sends the message that the Spanish banks can still support auctions."

"The tail seems a bit elevated, but that was expected. Spanish spreads will remain under pressure until we hear some details about what they will do with their banks ... There's nothing significant coming up that can help them. The only thing to improve the situation would be better data across Europe."


"A strong set of bid/covers but yields are at significantly elevated levels to when these bonds were last issued. It would appear that the LTRO related demand that saw a significant reduction in yields is now at its end and it is difficult to not see Spanish yields continuing an inexorable rise from here given the poor economic figures and the increasing talk of a bank recapitalisation being required."


"The cover was good, they sold marginally more than they were targeting, the tail is not too bad all things considered. However, relative to market levels at the time of the auction, we are really much more towards the bid side than the offer side.

"It's OK to good but there are some caveats on it."


"Bid cover ratios looks decent, as does the amount sold, but it is the prices of the auction relative to the secondary market which has disappointed the market a little, causing the lines to sell off on release of the results. I think this is the new normal which the market has to get used to as the strong LTRO-driven bids are a thing of the past."
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