Trader Talk

Euro Yo-Yo, but Spanish and Italian Auctions a Success


Euro yo-yo: Euro rallies on strong Spanish and Italian bond auctions, drops when European Central Bank leaves rates unchanged, rallies on poor U.S. retail sales and initial jobless claims.

ECB’s long-term refinancing operation (LTRO) was a success; yields drop in euro land.

Spain sold almost 10 billion euros ($12.7 billion) — twice the 5 billion euro ($6.4 billion) target — of bonds maturing in 2015 and 2016:

  • 4.27 billion euros ($5.5 billion) of the three-year at an average yield of 3.38 percent (previous yield was 5.18 percent in December) at a bid-to-cover of 1.8;
  • 2.5 billion euros ($3.2 billion) of a four-year bond at yield of 3.78 percent (4.87 percent previously), bid-to-cover 2.2; and
  • 3.2 billion euros ($4.1 billion) of five-year bonds at a 3.91 percent yield (4.84 percent previously), bid-to-cover 1.7.

Italy sold 8.5 billion euros ($10.8 billion) of one-year bills at 2.735 percent, less than half what it paid only a month ago (5.95 percent). Bid-to-cover ratio was 1.5, good but not outstanding. They also sold 3.5 billion euros ($4.5 billion) of three-month bills at 1.64 percent, bid-to-cover 1.85.

Bottom line: Yields are down across the board in Europe...Italian 10-year yields at 6.59 percent; it was over 7 percent yesterday.

The ECB has a success story on its hands with the LTRO. The next three-year tranche will be at the end of February: With this current tranche clearly a factor in reducing sovereign debt yields, you can bet the ECB will let the banks back up the truck on this one.

So are banks buying large amounts of sovereign debt ? It seems doubtful, since the bid-to-cover ratios were not that high.

Why were yields lower? Remember, the previous auctions were in December, before the ECB cut rates and launched the LTRO. It is a different environment.


1) S&P futures dropped 4 points on disappointing December retail sales and weekly initial jobless claims.

2) The ECB leaves rates on hold.

3) Chevron falls 2.3 percent after the oil giant released a fourth-quarter interim report yesterday warning fourth-quarter profits will be “significantly lower” than those of the prior quarter. The company said downstream earnings are expected to be near breakeven, blaming lower profit margins and refinery input volumes. Chevron releases its full earnings report Jan. 27.

4) Williams Sonoma drops 12.5 percent in pre-market trade after the retailer cuts its fourth-quarter guidance as holiday season discounting battered revenues. The retailer now expects quarterly earnings per share of $1.10 to $1.15, down from the prior forecast of $1.15 to $1.20 and the Street’s estimate of $1.19.

5) Royal Bank of Scotlandplans to shed 3,500 jobs within its investment bank as it flees unprofitable units, citing volatile markets and the cost of new U.K. regulation. The latest investment banking cuts are in addition to the 2,000 losses announced by the bank last summer. The fresh losses mean 11,000 positions have been cut at the division since the pre-banking crisis headcount of 24,000. Royal Bank of Scotland said it will now remove itself from the mergers and acquisitions.

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