CHART: Why Everyone Is Freaking Out Over Spain's Bond Auction Tomorrow

The Bank of Spain plans to auction between €1.5 and €2.5 million ($1.9 and $3.3 million) in bonds of 2.5 and 10 year securities tomorrow.

But financial media and investors are going nuts over this auction—as opposed to a sale of short-term bond auction on Tuesday—because of the maturity of debt Spain is selling.

As we pointed out earlier today, Spain has issued far more short-term debt than long-term debt, pandering to the cheap cash banks have because of the European Central Bank’s two three-year long-term refinancing operations. In fact, the Bank of Spain even issued a memorandum earlier this year (via @trumanfactor) giving it the ability to issue debt in new denominations that might coincide more favourably with investor demand.

Thus, Spain’s ability to sell 2.5-year securities that mature before the LTRO expires will be vital to how well Spain can weather the storm around its banks. Poor results on the 2.5-year auction would signal that investors are already ignoring the positive impact of the LTRO, and that Spain’s sovereign debt situation is about to get a whole lot worse.

breakdown of spain borrowing by maturityThis year (green), Spain has been borrowing far more debt with shorter maturity than it normally has by this date.

Photo: Simone Foxman for Business Insider/Bloomberg Data

NOT CONVINCED? READ: This Is The Number You Need To Be Watching In Spain >

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