Spanish Bond Investors Hope for a Bailout

Spain raised money in the markets in a highly anticipated bond auction. Tensions around the banking system have mounted.  

The country, now the epicenter of the debt crisis (until the Greek elections), had success in raising the maximum amount desired, but the price kept creeping up. Nevertheless, hopes for some kind of bailout are currently stronger than the actual results.

Spain raised 2.074 billion euros, just above the 2 billion maximum target. It sold bonds for 2014 (LTRO covered), 2016 and 2022 (benchmark ten yield bonds). All the auctions enjoyed a higher cover than earlier auctions. This means there’s still high demand.

However, investors still demand a high risk premium: all the yields were higher than in previous auctions, with the 10 year yield crossing the 6% mark, higher than the previous auction although lower than the existing yield in the secondary market: currently at 6.11%, lower than in previous days.

The high demand with low prices could be interpreted as expectations for a bailout that would eventually push bonds higher (and the yield lower).

Talk about a bailout for the troubled Spanish banking system has heightened in recent days, as global pressure on Germany became stronger. Spain is usually seen as “too big to bail”. A small bank bailout is now on the cards, yet this is only one of at least 4 bailout options.

The euro is also high, flirting with resistance at 1.2587. 1.2623 is much stronger resistance. For more on the euro, see the EUR/USD forecast.