Spanish Echoes

Includes: ERO, EWP, EZU, FXE
by: Michael McDonough

The spreads for Europe’s economically weak peripheries over equivalent German bonds—the European benchmark—continue to approach their pre-bailout highs. The 10Y spread in Spain again reached record levels amidst rumors that the IMF, EU and the U.S. Treasury may be creating a EUR250bn credit line for the country (so far the EU and the Treasury department have denied the report).

This coming Friday the head of the IMF, Dominique Strauss-Khan, is scheduled to meet with Spanish Prime Minister to discuss, “structural reform measures the government is undertaking, the labour reform to be approved tomorrow by the cabinet, and other measures to tackle the deficit, as well as measures by other countries and other economic zones.” Spanish officials have indicated that these meetings were scheduled prior to reports of a Spanish bailout. But, in the minds of some investors this visit is too coincidental, echoing a similar visit by the IMF to Greece just prior to that country’s own demise. (Click to enlarge)

Amidst this strife, Spain is expected to auction 10Y and 30Y government bonds tomorrow totaling an estimated EUR3.5bn. This auction will be watched closely by investors, and any signs of weakness could spell trouble for Spain, Europe and any global risk correlated assets. Here is a complete list from Barclays of expected European bond auctions for the remainder of the week:

Date Country Bond Amount (EURbn)

17-Jun-10 Spain 10y SPGB (total range €2-3.5bn) 2.00

17-Jun-10 Spain 30y SPGB (total range €2-3.5bn) 1.50

17-Jun-10 France 2yr BTAN (range €6.5-8bn) 2.00

17-Jun-10 France 3yr BTAN (range €6.5-8bn) 2.00

17-Jun-10 France New 5yr BTAN (range €6.5-8bn) 4.00

17-Jun-10 UK 2014 Gilt tap 4.00

17-Jun-10 France OATi Auction (range €1.3-1.8bn) 0.50

17-Jun-10 France OATei Auction (range €1.3-1.8bn) 0.40

17-Jun-10 France OATi Auction (range €1.3-1.8bn) 0.70

Disclosure: No Positions