Will Euro Bond Offers Spook Investors?

04/11/2012 6:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Last week’s Spanish bond auction certainly rattled investors, and MoneyShow’s Jim Jubak is keeping an eye on both the Spanish and Italian bond markets in the week ahead.

I know that on April 4, Spain really scared the bajeepers out of global stock markets. Spain held a bond auction; it got barely the minimum amount of bids that it wanted, and fell far short of the maximum. And the rates—the yields that Spain was going to have to pay investors to take these bonds, those few who showed up—rose markedly.

So, we’re looking now at a situation where yields on the Spanish ten-year benchmark are up to about 5.7%, after hitting a low of 4.6% or so way back in January. So the markets said uh-oh, Spanish yields are climbing, the Spanish debt crisis is not under control, the Spanish budget is not going to work, and there was a kind of ripple effect around the world.

But the country you really need to watch right now is actually not Spain, but Italy. Not because necessarily Italy is going to beat Spain to the door to be the next country that needs a bailout package from the European Union, but because Italy has got so much debt coming due that Italian auctions are going to be almost daily.

This means lots and lots and lots of opportunities for Italy to disappoint in terms of yield and number of bidders showing up. So, the problem really is that Italy not only has a lot of debt, but needs to roll over a lot.

Italy has a pretty big pool of domestic savings; they’ll eat some of it. Italian banks will take some of it. But we’re talking Italy needing to either refinance—it means roll over maturing debt, or sell new debt—to the tune of about €450 billion in 2012.

The bad thing, from the Italian Treasury’s point of view, is that as of the beginning of April, they’d really only gotten about a quarter of the way through their refunding needs. They’ve still got 75% of that €450 billion to go.

So the market is feeling kind of jittery. Spain made sure of that. Italy has got a lot of auctions coming up, and each one of those is going to be a chance for some disappointment on the part of the Italian bond auction.

Which means that really while Italy is auctioning off bonds on—you know, Tuesday, Wednesday, Thursday, next week Tuesday, Wednesday, Thursday—each one of those is going to be something that people are keeping their eye on. Each one of those is a potential event to make the market remember that the Euro debt crisis is not really over.

So the thing to watch right now is not so much the headlines about, oh Spain is in trouble or Italy is in trouble, but to watch day-to-day the results of the Italian (and to some degree, the Spanish) auction, to see who’s going to put more worry in the market on what particular day in April.

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