Spain and Italy Have Successful Bond Auctions

Yesterday, this journal stated that the good news about a booming German economy and an over-subscribed Portuguese debt auction could be undone with a poor showing in today's bond auctions by Spain or Italy. The positive momentum, however, continues to build as the market was quite enthusiastic about both. Spain sold € 3 billion five-year notes, which was at the top of its target, with more than € 6 billion bid. Italy sold € 6 billion, also at the top of its target.

The Spanish auction did require Madrid to pay a higher yield than its previous auction held November 4 of last year. This time around, the yield was 4.542%, quite a rise from the 3.576% paid last time. On the plus side, the market was expecting Spain to have to accept a yield of around 5%. In addition, the spread on Spanish debt over German bunds was 235 basis points (2.35%) for 10-year bonds. Last week, that spread was 300 basis points. So, it appears the market is calming down.

The Italian auction sold € 3 billion of five-year bonds at 3.67%, up 43 basis points from November's auction. The bid-to-cover ratio was unchanged at 1.4, meaning there were 1.4 euro bid for every euro of debt sold. Italy also sold € 3 billion of 15-year bonds at 5.06%, up 25 basis points from November. The bid-to-cover ratio on the 15-year bond was 1.4, up from November's 1.3.

The market also took as a positive sign the overseas interest, especially in Spanish debt. Last week, the Chinese government said it would continue purchases of Spain's paper and that it was pleased with the way Spain was attacking its problems. There's nothing like having the world's largest creditor snap up one's bonds to reassure the others.

Spain suffers from the same economic issues as Greece, Portugal and Ireland; that is, it binged on cheap credit far beyond its capacity to pay. Italy's problems are similar only superficially. Italy never really threw itself a credit party quite the way the others in the PIIGS group did. Italy's budget deficit is 5% of GDP, high but not quite in the same league as the budget deficits of the others. Also, Ireland and Greece are still in recession, while the Italian economy is growing, although not like Germany's.

The eurozone is not out of the woods yet, of course. The European Central Bank held rates steady today, but if inflation rears its head in Germany, one might well see an increase in interest rates across the eurozone. That would effectively wreck any recovery prospects of the PIIGS for the year if not longer. And there remains the grand concern that Spain may need a bail-out, which would put the screws to the rest of the eurozone. For now, though, things are looking up.

© Copyright 2011 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

Kensington Review Home