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Crucial Spanish Auction Tomorrow

Less than a day before a crucial Spanish auction, can you imagine the discussions that must be going on between the Spanish Ministry of Finance (or the Central Bank) and the Spanish banks?

If you can't, I'll bet it sounds something like this: "Okay, everyone, remember that valentine you got from the ECB in the form of BILLIONS of euros at 1 percent interest a few months ago? Time to consider what to do with that money, no? How about a little help here, guys?"

Buying sovereign debt, of course, has not turned out to be a great investment for European banks, but they are now caught in a strange, symbiotic relationship with their European sovereigns. Giving more is dangerous, giving nothing may be equally dangerous.

Yesterday, the Spanish paid TWICE the yield for 12 and 18 months bills than they paid a few months ago.

What will it cost for the 10 year tomorrow? The last 10-year auction for Spain was on January 19, when Spain auctioned 3.0 billion euros at a yield of 5.403 percent. Yields are now at 5.8 percent.

The auction is not large: 1.5 to 2.5 billion euros, for both the 2 and 10 year bonds. That’s tiny: they should have no problem covering it comfortably. That would be one indication of success.

The yield? I would suggest that anything with a 7-handle in front of it would not be greeted well by the markets.

And, if there's not enough to digest in euro land already, Mr. Hollande, the French Socialist candidate for president, has been talking about renegotiating the austerity treaty recently agreed to and instead wants more deficit spending.

We can dismiss this as political posturing (it is), but that doesn't mean it's meaningless.

There's also a French bond auction tomorrow. That should have some impact on yields as well.

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