12 January 2012 - "La Bamba" (Ritchie Valens, 1958)

12 January 2012 – “La Bamba” (Ritchie Valens, 1958)

Mildly positive open, catching up on yesterday’s slide. Cliff-hanger of the day was the Spanish bond auction, which fared tremendously well as the Tesoro printed twice the announced amount (nearly EUR 10bn versus targeted 5) at the lowest levels in months (March 2011 levels) (and this despite yesterday’s surge, continuing this morning ahead of the auction). Maybe the whole movement seriously squeezed out shorts and 3s were always seen, as already last month, as LTRO fodder. Not sure all dealers appreciated being taken by their word after having to overbid and then being served twice the amount announced at these levels (Se necessita una poca di gracia). Still, the result is there and Spain can now relax a little. 3 YRS bounced off the 3% level in the afternoon (from 6.10% end of November). Olé!

Likewise, the Italian bill auction brought good news with 1-year bills basically halved yield-wise since December (2.735% versus 5.95%). In both cases, bid-to-cover ratios (BC/C) were lower than in December, but given much lower yields, this is no real surprise. ECB deposits down by EUR 16bn from yesterday’s EUR 486bn record.

All this was good for an additional 1% in equities and half a point in EUR/USD before awaiting the ECB rate decision (unchanged, as expected) and Draghi’s 2012 opening speech. US figures were disappointing (No decoupling after all? Jobless numbers brushing the symbolic 400k number and lower retail sales. Actually the FED Beige Book stated yesterday that while there was some growth, it didn’t create jobs.). EUR thus drifting firmer to USD. Draghi remained cautious and defensive in his opening remarks, optimism faded out and equities kind of drifted away, but somehow markets held up with credit indices remaining very strong, giving overall an uneven close, depending on asset class (Equities flat of banks’ outperformance, after trading as much as +2% overall, commodities up, credit up, sovereigns all tighter). Greece PSI still a matter of tension. Credit much stronger today, but had been lagging equities off late, with Financials and Sovereigns doing great again, extending yesterday’s move.

All spreads to Germany again much, much tighter with Italy a star performer in a huge squeeze: Netherlands +32 (-5),Finland +39 (-5), Austria +115 (-12), France +120 (-15), Belgium +223 (-26), Spain +330 (-22) and Italy +480 (minus staggering 37!). Italian 10s crashing down to 6.66 from 7% yesterday!

The periphery gave back some ground into the close, as markets went from “risk on” to “not risk on anymore” mode. 10 YRS EUR swaps grinding lower though the rebound and trading another historic low of 2.27%.

Same comment as yesterday (although it was avowedly short sighted and too pessimistic) with regards to tomorrow’s Italian auction: It better be good, given the last days huge performance, otherwise players will be caught long or cut their short at the lowest levels since 3YRS traded 7.72% end of November. Belgium trying to kick off a new “reverse inquiry” auction and announcing today it would issue up to EUR 500m ultra long bonds (if demanded) tomorrow. Likewise, given this week’s 40bp tightening move there, a real test for appetite (or for the desperation of short positions) and maybe a little too opportunistic. Then again, Friday 13 might be someone’s lucky day.

Supply for today was always expected to be limited, given the Southern European auctions and this year’s first ECB statements. French motorway-concession APRR was the first supplier of the day with a EUR 500m deal announced in the morning, followed by Spain’s REPSOL, which was very quick to announce a 7 YRS deal within 15 minutes of the successful Spanish auction. Add a sizeable EUR 850m 10 YRS French covered bond tap by BPCE and some defensive FMS 2 YRS FRN (German government-guaranteed) to round up the day.

Waiting for tomorrow’s Italian auction (although sadly for the dealer at completely depleted yield levels) and not for much more given the weekend (lengthened for US players). Might see some opportunistic taps or offers, but supply really needs to get digested before launching another round of funding all you can eat. As usual, beware of last minute Greek news or the now near-traditional French pre-weekend downgrade rumour (ahead of a long US weekend).