Daily Commentary: On Auction Results from Spain

By Edward Harrison On Apr 19, 2012

Today’s big news was the bond auction in Spain. Spain’s auction went off without a hitch but at a cost. Spain sold 2.5 bln euros ($3.3 billion USD). The Spanish Treasury sold a 1.1 bln euro bond maturing 31 Oct 2014 (average yield: 3.463%, bid-to-cover: 3.3 vs 2.0 at previous auction in October). The Treasury also sold 1.4 bln euros of ten-year paper due Jan. 31, 2022 with a yield of 5.743%. While the bond was 2.4 times subscribed, better than the 2.2 times at the last primary auction in January, the average yield then was 5.403%.

Now Spain is saying it has covered 47% of this year’s bond issuance but the country remains in the throes of crisis. Yesterday, we received news that Spain’s credit delinquencies are at a near twenty year high of 8%. And house prices fell another 7.2% in the first quarter of 2012. This represents a sharpening of the pace. Even so, the ECB is not looking to offer a lot of support. Influential Bundesbank president Jens Weidmann said about the rise in Spanish yields “we shouldn’t always proclaim the end of the world if a country’s long term interest rates temporarily go above 6%. That is also a spur for policymakers in the countries concerned to do their homework and win back market confidence through the pursuit of the reform path”. As I have been saying, the ECB wants to use the deficit stick to get Spain and Italy in line and are prepared to suffer crisis again and again to do so.

Italy has bond auctions next week. So we will see how the periphery is doing after that test. I should note that Italy’s industrial orders plunged -2.5% month-to-month in February and that the Prime Minister Mario Monti has announced the country will miss its deficit target as the GDP contraction estimate has widened. Given the recent data, even this revision to GDP and deficit projections is too optimistic. Expect more slippage.

In other news, the Brazilian Central Bank cut rates by 75bp to 9.0% (as expected). The economy there has plenty of downside risk and Brazil is moving aggressively to prevent a hard landing. Further cuts are therefore expected.

That’s it. Here are the links.