Markets are destroying Spanish equities right now, as investors jitter over how Spain will manage a €19 billion ($24 billion) bailout of the country’s third largest bank, Bankia.
This angst is manifesting in bets against the Spanish government, with investors freaking out that yields on 10-year bonds are nearing 6.5 per cent.
But even more worrisome is the dramatic rise in borrowing costs on shorter-term debt maturing in less than three years. Rising yields in this debt indicate that investors have so quickly lost faith in Spain that they are ignoring the effects of the last long-term refinancing operation (LTRO) on February 28.
The second of two such operations allowed banks to borrow unlimited funds at historically cheap rates for three years, essentially ensuring that they will have a significant amount of money they won’t have to account for until 2015.
Clearly, any faith in those liquidity operations is vanishing. Yields on Spanish two-year bonds are up 22 basis points today, hitting 4.7 per cent. That’s more than double the cost of borrowing from just two months ago—in March, yields on two-year bonds were just 2.2 per cent.
Take a look at yields on those bonds over the last year: