This morning, the Spanish government initiated its bond auction process this year. The auctions were a success with the yield on 10-year government bonds falling to 4.95%, below 5% for the first time since March 2012. According to Reuters, Spain sold 5.82 billion euros of bonds maturing in 2015 bonds “and re-opened 2018 and 2026 debt”. So this is medium to long-dated paper.
Reuters makes the crucial point that the auction for bonds maturing n 2015 is for two-year paper that ostensibly falls under the auspices of the OMT program that the ECB initiated last year. So this paper is backstopped and we can expect good demand for it as a result. It is the fact that demand for longer-dated paper was high and that the ten-year yields are falling that makes this auction such a success. The German-Spanish ten year spread is now down to 345 basis points from as much as 610 basis points in July, pre-OMT.
Ireland passed a similar test on Tuesday. Therefore, we are seeing good appetite for higher yielding paper in Europe. The question is how long this lasts. As I wrote on Tuesday, “January, April, June and October are the periods of greatest funding” for the Spanish government and so this is the first test, which Spain is passing with flying colours. My concern is that the Spanish need macro events to remain positive for appetite for Spanish paper at low yields to continue. We have another 159 billion euros of maturing bonds and additional funding needs to meet in Spain. So this is just the beginning. It’s a good beginning though.