We have mentioned before that yields on Spanish (and Italian) bonds that mature before the European Central Bank’s three-year LTROs expire are the most important indicators of angst or strength in Europe.
Spanish banks have higher incentive to purchase bonds that mature in this time period because they have cheap money from the ECB to do so.
Turns out that the yields on Spanish two-year bonds are falling dramatically this morning, despite the initial negative reaction to ECB President Mario Draghi’s refusal to take immediate action to address the crisis at a press conference yesterday.
He did, however, say that the ECB was looking to target the short end of the yield curve on sovereign debt, implicitly committing to future bond-buying action in the shorter term.
Yields on Spanish 2-year bonds appear to have reacted to these statements. They fell about 11 basis points yesterday and are down 34 basis points today.
UPDATE: Yields on the Spanish two-year are now down a whopping 73 basis points, rapidly falling towards 4 per cent. If these same borrowing costs play out at auction, then Spain will see its lowest yields since early July.
Check out those yields in the last few hours: