IB Net Payout Yields Model

Spain, Italian Bond Yields Plunge

Evidently the 3 year funding program initiated by the ECB at the end of 2011 was more crucial to the bond markets than anybody originally thought.

Spain issued twice as many 3 year bonds as planned at a yield significantly lower than last year. The 10 billion euros were priced at 3.38% compared to 5.18% when auctioned in December.

Italy placed 12 billion euros and greatly reduced rates as well.

So much for the funding concerns that Europe was suppose to face in 2012. The ECB liquidity measure has been a boon for at least bonds 3 year or less in duration. Now extending bond sells to 5 & 10 years might be an issue. For example, Italy still has a 10-year yield of 6.6%.

This news makes me wonder how the Corzine trade at MF Global would've faired now considering the drop in rates. Those 1 year Italian notes would've paid handsomely at this point.

Some more good auctions like this and the market will put Europe on the back burner and start focusing back on fundamentals.

Per BusinessWeek article:

  • Spain sold 10 billion euros ($13 billion) of bonds, twice the target for the sale, while Italy placed 12 billion euros of bills, easing concerns the countries would struggle to finance their debts and sending bonds higher.
  • Spain sold a new benchmark three-year note due July 2015 to yield 3.384 percent, the Bank of Spain said in Madrid. That compared with 5.187 percent the last time similar maturity debt was sold in December. 
  • Italy’s Treasury sold one-year bills at 2.735 percent, less than half the 5.952 percent paid on similar- maturity securities on Dec. 12.
  • The ECB lending “means there is abundant liquidity in the system and this is something that helps ease the supply pressure,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.
  • Spain’s benchmark 10-year bond yield declined 20 basis points to 5.13 percent at 2:20 p.m. Madrid time, the lowest in more than a week. Italy’s 10-year yield slipped 35 basis points to 6.63 percent, while the yield on Italian two-year debt plunged 54 basis points to 4.17 percent.
  • “The effect of the ECB’s latest liquidity measures is palpable and has been a boon for the shorter end of the curve,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London said in an e-mail. “Few would have predicted as recently as last month that Italy would be paying as little as 2.7 percent for 1-year paper. This is on a par with Italy’s borrowing costs before it got sucked into the euro-zone crisis in July.”

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