Europe

Spanish Bond Auction Disappoints Investors, Ten Year Yields Jump

Spanish Bond Auction Disappoints Investors, Ten Year Yields Jump

US markets are shapely lower on Wednesday morning because of a disappointing Spanish bond auction which gave traders the feeling that Europe’s debt crisis could be starting to get worse again but with Spain instead of Greece.  Spain was selling medium term bonds and was hoping that its latest 27 billion euro debt reduction package would help grow confidence in the country and ultimately buy bonds.  Needless to say, that is not what happened because Spain only sold 2.6 billion euro worth of bonds which was the on the lower end of projections.  The bonds sold today will expire in 2015, 2016 and 2020.

After the disappointing bond sales, Spain’s ten year note rose 0.22% to 5.63% and just a month ago it was a manageable 4.9%.  The problem with rising interest rates is that the country now has to pay more for the same bonds.  In addition, 7% is considered by economists to be the level that the countries will likely default at because they will not be able to sustain the payments.   The Spanish rate hit a high of 6.7% back in November.  If we see rates at this level or at 7%, expect some down days in the market because traders may use this as an excuse to get out of the markets.

All of this comes after the Spanish government has been actively working to cut spending and the deficit.  In fact, the conservative government unveiled the new 2012 budget, in which they will cut 27 billion euro in spending and increase taxes.  Unfortunately, the country also announced that their national debt level would increase from 68.5% of GDP to 80% of GDP.

It is nice to see a government working together to solve problems, something that we are not used to here in the US.  Their government was able to collaborate together and deploy proper debt reduction tactics to help them get out of this mess.  If only the US government would start to get serious on our debt load. Unfortunately, they still project a large increase in debt which is troublesome.

Right now we are experiencing market complacency it seems because investors have been ignoring the Spanish problem since November once interest rates fell.  Now the problem is showing itself once again and since the market appears to not have this Spanish debt crisis priced in, we could see some bearishness start to boil over.  Europe is obviously still a major concern for investors and traders here in the US so don’t ignore it just be ready for what comes at you.

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