Back to the familiar grist of a Spanish bond auction today. This one has real power to move global markets as it offers up a 10-year bond for only the second time this year. Because of the ECB’s three-year money glut and the general point that uncertainty rises the longer you stretch the timeframe, shorter-term paper has been a much easier sell.
10-year yields broke above the portentous 6 percent level for the first time since late November earlier this week though they have since ducked back down.
Madrid is looking to sell up to 2.5 billion euros of 2- and 10-year bonds – a relatively small amount which should attract the requisite demand. But yields will climb. The last 10-year auction went at 5.4 percent. On the secondary market those yields are now around 5.8.
Given markets are positioned for a solid sale, there is clear downside risk if it doesn’t happen.
One potential problem is that the big buyers of Spanish and Italian bonds have been domestic banks, which are not in the rudest of health and would be even more exposed if sovereign yields head yet higher. The IMF said yesterday it expected Italian banks to buy 223 billion euros in domestic government bonds this year, with Spanish banks buying 135 billion. The IMF also warned that Europe’s deleveraging banks will shrink their assets by $2.6 trillion over the next two years, further starving the real economy of credit.