Pre-Auction Reminder: Spain's Running Out Of Ammo
Ahead of the French and Spanish auctions this morning, which given their widespread discussion as catalyst numero-uno in the resurgence of systemic risk in Europe are likely to be pumped and presented in the best possible light for all to gorge their bullish eyes on, we thought it worth a quick reminder of just how awkward things might be getting in Spain. As the WSJ reports tonight, the main (and likely only outside of CDS-bond basis traders) buyer of Spanish bonds is the Spanish banks and they are running very dry of ECB-provided cash money to do their bidding. UBS estimates that there is a remaining EUR21bn of pocket-money with the banks to cover the EUR47bn that Spain needs to roll this year alone.
The simple sad fact is that finding buyers of last resort are dwindling as the banks lose their deposits to the core, cover their own significant redemption needs, and struggle to choke down more Sarkozy-inspired sovereign (carry) debt - all the while leaving an ECB unable to directly enter the primary market (hence Soros' recent SPV financial engineering workaround to enable this).Besides this uncertainty there are four things are critical to remember before you go all-in on your Spanish 10Y bid (or judge the post-auction hysteria).
1) Bid-to-cover is a useless statistic in these cases as a plethora of bidders (e.g. basis traders - note the current basis is +19bps - which posits 'selling' bonds not 'buying' them - which means the auction would have to come dramatically cheap to secondaries to make it attractive for the hedgies) would be willing to pick these bonds up at extremely high yields should they trade there (e.g. how much would you bid at a 30% yield? 40% yield?) and in no way reflect real money's risk appetite;
2) Every time the ECB steps into the secondary Spanish bond market via its SMP program it subordinates your freshly minted bonds (via its Greek-related unwillingness to take a haircut);
3) It's all about the yield - if these bonds come cheap to secondaries and notably beyond the previous auction then that is the critical signal of what is being anticipated and given the rapidly diminishing bucket upon which the Spanish banks can draw to fund their domestic symbiotic partner, we suspect it will not be pretty; and
4) Given the EUR46bn that the Spanish banks themselves need to roll in the next three months, we suspect they will prefer to keep a little more dry powder than blow it all on their sovereign purchases today.
and.....
Complete 2012-2013 European Bond Issuance Calendar
Now that those so inclined are once again advised to wake up at 4 am in the morning just to keep track of the Bid To Cover of each and every blowing out European auction (which absent a few trillion in ECB liquidity would be a sheer disaster), just like in the summer and fall of 2011 (but remember, according to Jim O'Neill 2012 is "nothing like 2011"), it would be useful to have an updated calendar of all the action in Europe for the rest of the year. So courtesy of Goldman, here it is: set your alarms.
QE to Infinity is set in cement in the “European Stabilization Mechanism Treaty." This is the new European Union and the euro. It will be in place and operative by July of 2012.
European Stability Mechanism From Wikipedia, the free encyclopedia
The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism in the 17-member Eurozone. The ESM is due to be launched as soon as Member States representing 90% of the capital commitments have ratified it, which is expected in July 2012.[1]
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