Yields on Italian and Spanish bonds are dropping fast this morning, after a bond auction in Spain saw decent demand from investors.
Borrowing costs remained high at auction; for example, yields on two-year notes rose from 2.069 per cent last month to 4.706 per cent. However, the fact that primary market borrowing costs were below where yields in the secondary market–they started at over 5 per cent today–suggests that the bearish reaction to the Spanish bank bailout deal might be overblown.
We have argued in the past that yields on two-year bonds in Spain and Italy may prove the most important data points in Europe, since two-year borrowing costs take into account the effects of the European Central Bank’s two liquidity-providing long-term refinancing operations. With Spain under fire from investors after its bank bailout, indicators of Spanish government following stress have become urgent. See our full reasoning here >
Yields on Spanish two-year notes have fallen a dramatic 28 basis points today. This seems to be continuing a trend that began early this week, Take a look at 2-year notes today: