Yields Dive at Spanish T-Bill Auction; Has The Bazooka Been Fired?

While the ECB has not officially announced the introduction of the much anticipated “bazooka” in order to drive yields down (and has repeatedly denied that a limitless bond buying program is forthcoming), the overall goal appears to have been achieved at the latest Spanish T-Bill auction.

Although ECB President Mario Draghi has reminded the markets on numerous occasions that it is against the central bank’s charter to provide loans to or bailout member states, the unorthodox measures taken at last week’s monthly meeting may be starting to take the sting out of the current crisis.

Recall that the ECB introduced last week two three-year LTRO facilities which will provide banks with unlimited funding at 1%, with the first such offering beginning later today. This will allow banks to participate in the buying of sovereign debt from neighboring countries and hopefully restore confidence to the debt markets.

Dubbed the “Sarko Trade,” as the idea of borrowing from the ECB at 1% and investing in sovereign debt at much higher rates, was originally offered by France’s Nicolas Sarkozy, the hope is that Europe’s banks will effectively do what many had hoped the ECB would do by firing their own bazookas at the problem.

If the T-Bill auction in Spain held on Tuesday is any indication, the move looks to be a resounding success so far.

Yields plunged at the latest T-Bill auction held by the Spanish Treasury on Tuesday as investor confidence returned to the market.

Spain sold €3.72 billion of 3-month T-bills Tuesday at an average yield 1.735%, which was dramatically lower than the rate of 5.110% seen at last month’s auction.

Spain also sold €1.92 billion of 6-month T-bills Tuesday at an average yield 2.435%, which was again significantly lower than the rate of 5.227% from the prior auction.

In addition, demand was strong for both offerings as the Madrid-based Treasury the amount of bills sold easily exceeded November’s offerings and the bid-to-cover ratios were strong.

However, some analysts are urging that investors not read too much into the results. Elisabeth Afseth, a strategist at Evolution Securities Ltd. in London told Bloomberg that the result of Spain’s auction “is partly related to the tender rather than a sudden and complete change in sentiment toward the peripheral European markets.” She said, “It may be Spain is benefitting more from this than other countries as it has a larger banking sector which is a little more immune to the clear scrutiny of shareholders.”

While the jury may still be out on the subject of confidence being restored in European debt markets, there is no denying that the today’s results in Spain are a welcomed first step.

 

  iShares Spain - Last 12 Month

 

 

Remember, you are in control your email alerts! You can receive alerts for more than 25 free research report alerts including: The “10.0” Report, The Insiders Report, ETF Leaders Report, and The Focus List.