Yesterday we were perplexed by the description of Greece’s 6-month and 1-year government bills sale as ‘successful’. It appeared to attract a lot of demand, but yields Greece had to pay investors were extremely high for such short-term money, for example the 1-year bill sold at 4.85% which is far higher than it was just back in mid-January.To recap: “Yet Greece can’t fund itself entirely on short-term debt, so let’s wait and see how 10-year Greek bonds do. Because 4.85% for 1-year money still seems extremely expensive to us right now and still a bad sign for market confidence in the country’s finances… despite the surge in buying demand.”
Clearly we weren’t the only ones nonplussed by Greece’s auction yesterday since 10-year Greek bond are now deteriorating. Their yield is surging back towards the 7% mark and it appears there was a reason for the apparently ‘strong’ buying demand yesterday.
Analysts say the auction wasn’t necessarily a good gauge of foreign demand. Greek banks tend to be heavy bidders at such auctions, while foreign investors prefer longer-term maturities, and the 10-year bond yield climbed Tuesday to 6.86%.
Greek banks don’t count as a source of buying demand we should use as an indicator, since they essentially fall into the potential-bailout camp along with the Greek government, in the case of a crisis. They might as well pick up short-term debt at decent yields since if the Greek government is at risk of default they’ll be in deep trouble regardless, so they mind as well have picked up some decent short-term yield along the way.
Fair enough, we’ve been rightly told how short-term yields can sometimes be a more important indicator than long-term ones for Greece, but in this case, in terms of judging market confidence based on the most recent bill auction, we’ll take the deterioration in 10-year bonds as a sign that yesterday’s ‘successful’ auction wasn’t so hot.
The next big day will be May 19th, when Greece has to pay back a $8.7 billion bond that will mature.
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