Successful Spanish and Italian auctions of shorter-term debt offered a welcome breather for crisis-weary European bond markets on Thursday, but analysts warned that the sale of 10-year bonds will provide a more accurate indication of market sentiment.
Spain easily raised double its target from the auction of bonds maturing in April and October 2016 and a new 3-year bond.
Meanwhile yields for Italian 12-month debt more than halved at its auction to 2.73 percent from 5.95 in December Stocks rallied following the auction results and the euro reached its highest level of the day against the dollar.
Analysts cheered the outcome of both auctions, but warned that it also raises questions about what will happen with longer-dated maturities.
“The Spanish auction was a very big success…I can’t remember an auction where they’ve sold so much,” Laurent Fransolet, head of European interest rate strategy at Barclays Capital told CNBC.
Fransolet and others believe the auction was boosted, at least in part, by banks who used cheap money they borrowed from the European Central Bank last month for the operation.
“Maybe this is a sign that the principle behind the LTRO is starting to work,” Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets told CNBC, referring to the ECB’s long term refinancing operation launched in December.
That operation saw banks take up almost 490 billion euros in 3-year loans from the ECB, much more than analysts had expected.
“They’re putting this liquidity into the banking sector. They’re encouraging them to effectively play the carry trade which is ‘buy longer-dated bonds, finance in the short term’. If this theme continues then we have our European bond market back,” he said.
Diebel added that Spain have been making fairly strong strides towards rectifying its fiscal situation, and stressed the country was in a very different situation to debt-ridden Portugal and Greece.
“It’s much less structural. It’s much more to do with the banking sector and the housing market. The good thing about this is, as long as you’re prepared to come up with a plan to tackle that, you end up with a containable situation where you can effectively write off the bad debt and restructure,“ he said.
But while the ECB’s action might have been a good first step in supporting euro zone sovereign debt, the impact on longer-dated maturities remained uncertain.
“It’s a giant loop…The ECB — who is not allowed to do QE — is giving the banks cheap money. They are going to the sovereigns and doing that job for them and then depositing that money as collateral back to borrow more money,” Maurice Pomery, managing director at Strategic Alpha said.
“It’s doing the trick to start with, but I think the game might be seen for exactly what it is,” he said. “This is de facto QE or money printing in a different way.“
Zane Brown, Fixed income strategist at Lord Abbett also warned that with banks so focused on shrinking their balance sheets and gaining stability, 10-year debt issued by troubled euro zone sovereigns still remained unattractive.
“That’s an awful lot of price risk on their balance sheets and that’s probably the last thing they want to do right now,” he said.
