Remember when Spanish debt fears gripped the markets? We do too … since it was only 15 days ago that Spanish CDS hit all time highs! If you can, make the enormous leap forward to today (note the heavy dose of sarcasm).
Spain attempted to auction 3 billion euros of debt and received decent demand, although at much higher yields. The 18 month bills sold at 3.721% vs. 2.664% last month, however, the bid to cover was stellar at more than 4 to 1. The markets verdict is that Spain can finance its debt, just at much higher prices. The higher short rates have boosted the entire curve and Spanish 10 year yields have soared.
Spanish 10 Year Bond Yield
BUT, importantly Spanish CDS have NOT hit new highs ...
Spanish CDS
Our view is that the markets believe that either Spain will not default or that they will be supported by the ECB. However, the size of the Spanish economy and debt is an order of magnitude larger than Greece or Ireland. Therefore, the market wants to be compensated for the additional risk that Spanish support will significantly weaken the financial position of the ECB.
Disclosure: Accounts managed by Kanundrum Capital are long US dollars.
