Spanish Auction Results Muted Ahead of ECB

Spain saw yield rise slightly on its 10-year bond at auction Thursday ahead of the much anticipated policy announcement from ECB President Mario Draghi. However, yields quickly reversed in secondary market trading and were lower than the open at 6.651 percent.

Spain auctioned 3.13 billion euros of 2-, 4-, and 10-year bonds Thursday to mixed results. Spain sold 1.06 billion euros of 2-year bonds to yield 4.774 percent from 3.592 percent at the last auction. Also, Spain sold 1.024 billion euros of 4-year bonds to yield 5.971 percent from 5.536 percent at the last auction. Lastly, Spain sold 1.046 billion euros of 10-year bonds to yield 6.647 percent from 6.43 percent at the last auction. However, the focus was not on the yields so much as it was on exactly what Draghi plans to do later today.

Of note in the auctions was the drop in 2-year yields. 2-year bond yields are used as a proxy to measure short-term borrowing health and overall solvency, so a drop in these yields may signal that markets believe that Spain will remain solvent, either on its own or with central bank support. Economists expect the ECB to announce a new round of crisis-fighting measures later Thursday to support the finances of peripheral nations, including Spain and Italy.

Jens Nordvig, chief fixed income strategist at Nomura, this morning on Bloomberg's Surveillance noted that he expects a rapid policy response from the ECB, even faster than most analysts expect. He believes that the ECB will cut rates at 7:45 am EST and then will announce a new round of bond purchases during the press conference later on. As soon as some bond market stability program is announced, he expects the ECB to begin buying bonds, even while the press conference continues. He thinks this will be a shock to the market, driving down yields on Spanish bonds by about 50 basis points on the 10-year bond.

A response such as the one described by Nordvig would be the kind of large, rapid response wanted and now expected by the markets. However, the it remains to be seen if the ECB can surprise markets at this point. Draghi showed his metaphorical hand last week in outlining new policies, and now it could be that markets are already expecting a large plan and so only something unexpected, even larger than just buying bonds for example, could really shock financial markets at this point.