Weak demand at auction sends Spanish bond yields soaring; France gets sucked further into the crisis

11/17/2011 12:26 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Not quite a failure but not good.

Spain’s auction of 10-year government debt today, November 17, saw a rising yield and falling demand. The country did sell 3.6 billion euros ($4.8 billion) in 10-year bonds but the yield climbed to 6.975% from 5.433% at the October 20 auction. (The yield on the new 10-year bonds was even slightly above the 6.69% yield on 10-year bonds trading in the secondary market.)

Spain had set a maximum target of 4 billion euros for the sale, so 3.6 billion wasn’t too far off the mark. But in spite of the worryingly high yields demanded by investors, demand for the bonds dropped. Demand was 1.54 times the amount sold; that’s a big drop from the 1.76 ratio at the 10-year auction in October. The demand to amount sold ratio was the lowest since 2008, according to Bloomberg.

On the other side of the Pyrenees, the French bond auction didn’t go a whole lot better this morning. The government sold 6.98 billion euros of medium-term notes—near the 7 billion top target for the auction—but yields rose from the October auction. The note maturing in September 2013, for example, sold with an average yield of 1.85%. That was a big jump from the 1.31% yield at the October auction.

In the secondary market the spread between the French and German 10-year bonds continued to widen with investors demanding a 2-percentage point premium in yield to hold French debt. That’s the first time the yield spread between French and German 10-year debt has hit two percentage points since the launch of the euro.

Investors worried about whether contagion from the Greek and Italian debt crises will spread to Spain and France can now relax—without a doubt it has.

The only positive note that I can see in this is that the spread of the crisis to France is likely to change the political dynamic in the EuroZone for the European Central Bank. While the crisis was limited to Greece, Italy and Spain, it was relatively easy for France and other AAA-rated countries such as Austria and the Netherlands to back German insistence that the European Central Bank should not become the buyer of last resort in the bond market. But with France being drawn into the crisis—and with even yields on Austrian and Dutch debt starting to feel the pressure—Germany is increasingly isolated in its absolute opposition.

I think we’re moving toward a point where national self-interest will trump ideology.

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