Spanish debt auctions revealed little about finances

WHO ever said that debt auctions from Club Med countries were boring? Certainly nobody who follows the markets closely – these days, they are often the central economic event of a week. Take last week’s Spanish debt auctions, which ended up raising more questions than they answered.

On Tuesday the precursor was an auction of 12 and 18 month T-bills. It seemed to go pretty well. Yields surged as we had expected, with the average yield on the 18-month debt at 3.11 per cent compared with 1.17 per cent last time.

Still, they got it away and the bid-to-cover was strong.

Next we turned to the two-year and, more importantly, the 10-year on Thursday. This was supposed to be the big one -- the auction that would reveal just how bad perceptions about Spain had become.

But when the auction results came out, the reaction was sceptical. Many analysts and commentators said it was stage-managed – and so much so that it revealed little about the fundamental picture.

The average yield ticked up to 5.74 per cent from 5.4 per cent last time and yields rose after the auction too, which suggested there are still some worried investors out there.

But one metric that reveals another trend was the bid-to-cover ratio.

Spain received 2.4 times as many bids as bonds on offer on the 10-year and even more on the two-year. On the surface of it, that looks positive, but Nick Beecroft of Saxo Bank has reservations.

Beecroft points to the European Central Bank’s (ECB) three-year Long Term Refinancing Operation (LTRO). He says that Spanish banks borrowed heavily at the ECB’s cheap money-fest – and that the money was soon on a circular path back to Spanish government debt.

And what starts out as a headache for Spain could easily turn into yet more contagion.

Markets use these auctions to try and pinpoint risk trajectory, according to Silvio Peruzzo of RBS, who sees the Spanish situation deteriorating in the second quarter.

“Any indication that borrowing costs are rising will reignite concerns about risk for the whole Eurozone,” Peruzzo told me last week.

In fact, Mark Tinker of Axa Framlington says bonds are not the best indication of underlying economic realities anyway. And that equity investors need to focus on the basics – how much money is there in an economy and what is the impact on demand for and supply of stuff?

Certainly the Spanish bond auctions last week weren’t very illuminating on that front.

But let’s suspend disbelief and look at the market reaction to the week in Spain. Having dropped significantly below six per cent mid-week, the Spanish 10-year was back above that key threshold through Friday while Bunds registered record low yields.

And in the equity markets the IBEX bumped along three-year lows, which adds up to continued concern about peripheral Europe in my book.

Despite all the turbulence the euro is stuck in a long-standing trading range in the low 1.30s and year-to-date is up 1.37 per cent against the dollar. That is, of course, bizarre. Surely the euro’s strength cannot possibly last? The answer, as ever, will be found in government debt auctions.

Rebecca Meehan is an anchor at CNBC.