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Spain

04/05/2012

Global markets awakened Wednesday morning, April 4, to the news that the eurozone’s fourth largest economy, Spain, had conducted a less-than-stellar bond auction. This was the first bond auction since Spain’s 2012 budget was unveiled on March 30. I suspect there is a direct correlation between today’s soft auction and that budget.
 
Bond Auction Results
 
•         The Treasury set a pre-auction target sale of 2.5 to 3.5 billion euros’ worth of Spanish debt.
•         The Auction sold only 2.6 billion euros, the low end of the Treasury range.
•         10-year yields (Figure 1.1) rose to 5.69% – the highest level since January 9 but still below the uncomfortable levels above 6% seen in the fall of 2011.
 
Why Now
 
Wednesday’s tumult in the Spanish debt market is directly related to the March 30 budget revelation and this week’s government comments:
•         The fiscal consolidation outlined is for 2012 and 2013, yet the markets wanted a longer commitment beyond 2013; in fact, certain measures actually expire in 2014.
•         Prime Minister Mariano Rajoy once again highlighted the risk that Spain could be “shut out “ of the debt markets and face a similar bailout scenario as Greece.
•         Spain is enacting fiscal austerity at a time of expected negative growth for 2012 and 2013.
•         Spain’s debt-to-GDP will reach 80% in 2012, the highest level in 25 years.
•         Spain has the highest unemployment in the EU at 24%.
 
What Next
 
Obviously the need to monitor Spanish bond yields is once again present. The fiscal risk premium in Spain has risen as of Wednesday. However, I do not expect Spain to be the cause of a significant, sustained global market correction on its own. A significant slowdown in U.S. labor, U.S. earnings growth, or a spike in oil prices are the three conditions far more likely to derail the markets.
 
The ECB will keep accommodative measures in place to keep Spain’s funding needs fluid. A third round of the LTRO could be conducted, or even an interest rate cut. I disagree with those expecting an interest rate hike to fight modest inflation fears in Germany.
 
Stand by….the need to look east of the Atlantic each morning is present again.
 
Figure 1.1 Spanish 10-Year Bond Yields – Past 52 Weeks
 

Source: Bloomberg
 

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