The cost of insuring European bonds from default is lower this morning. The question is whether this is a one-time relief move or the start of something more substantial.
Some commentators have argued that Greece should emulate Russia and simply default. This is almost comically misguided.
While the headlines surrounding Greece have been relatively bullish, the price of insuring euro zone debt against default has soared back to historic levels.
Good news coming out of both Spain and Portugal today. Not only is the euro zone not coming to an end, but it looks like the odds are shrinking that either country will be “the next Greece.”
Buyers continue to dip back into the Spanish bond market in search of high yields. The latest Madrid debt auction raised $4.95 billion — a little more than the government was hoping to get, and a welcome change from just a month ago, when bids were hard to come by.
Despite that, Spain still had to offer investors significantly higher interest payments to tempt them to take the newly issued three- and six-month paper. Spanish three-month notes now pay an effective yield of 91 basis points and six-month debt pays 1.577%, both up substantially from a month ago.
The “spread” or premium that markets demand in order to accept the risk of buying long-term Spanish bonds also widened a bit, but is well below the record levels we saw last week.
Although some traders are still nervous about a looming $29 billion bond payment that Spain will need to make next month, the recent auctions have demonstrated that the country can still find lenders willing to extend credit and roll over a lot of that debt.
Furthermore, Spanish finance officials remain upbeat about not needing to tap the European Union’s rescue fund to make its payments. Finance minister Elena Salgado categorically denies that such a move will be necessary, and this confidence is keeping the traders from the exits.
Portugal looking better
There is even good news for Portugal, which has suffered in relative silence as its much larger neighbor gets the bulk of the bad headlines.
According to the latest statistics, Portuguese tax income is up 6.3% so far this year on an annualized basis, while government spending is up only 1.3%. In other words, the country’s balance sheet is improving in terms of both stronger top-line growth and weaker cost expansion. Just another positive sign.
In general, traders seem to be climbing the wall of worry as time goes by, deadlines are met and the numbers improve. At this rate, the euro may actually get a nice run for a bit. You can trade it via ETFs like EU:
The bearish buzz around Europe is back with us today. It is too early to tell whether most of these rumors are true, but as far as the market mood goes, all the smoke is as bad as a fire.
As yet, the European Union says it is “bizarre” that traders are speculating about an emergency
Spain’s most recent debt auction received a tepid response, but at least the country found buyers for $6 billion in fresh paper. This is a good sign for Spanish stocks and the euro.
Some people are reporting this sale as a failure because lower bids force Madrid to pay significantly higher interest on 12- and 18-month bills. But while a roughly 90-basis-point risk premium adds to Spain’s borrowing costs, the total extra interest only comes to around $50 million. When you are dealing with $6 billion in principal, $50 million is not exactly a huge sum.
What is most impressive about this sale is that plenty of buyers emerged. Just three weeks ago, Spain could barely find enough bids to cover a similar auction. This time around, investors were hungry for 1.5 times as much 12-month debt and 3.4 times as much 18-month debt as Madrid had on the block.
The fact that the euro is stronger this morning should tell you all you need to know about whether this closely watched deal was a success or not.
Traders looking to lock in a prospective euro bounce can buy into ETFs like EUR.
This story is also positive for Spanish stocks. Spain has impressed investors by cutting some of its budget deficit and refinancing some of its debt. The near-term risk of the country imploding is receding, and in its wake valuations in Madrid look impressive.
Extreme value still exists in names like Telefonica (TEF), Banco Santander (STD) and one of our favorite tactical oil names right now, Repsol YPF (REP).
The latest country to claim the mantle of being “the next Greece” is a little surprising, and it shows how politicized the whole issue has become.
Japan’s new prime minister, Naoto Kan, explicitly compared his debt-laden country to Greece in a recent press conference:
“As we have seen with the financial confusion in the European community stemming from Greece, our finances could collapse if trust in national bonds is lost and growing national debt is left alone.”
This is being picked up in the media as a sign that the end is near for Japan, which is still the world’s second-biggest single national economy.
But buried under the headlines are hints that the comparison to Greece does not run very deep. Japan owes about 218% of GDP, but most of that debt is held by domestic investors who are unlikely to force a default.
Furthermore, the country owns massive amounts of other nations’ bonds and has a positive trade balance, which means that more money is flowing into the economy as the world buys Japanese products.
Local economists say the prime minister is simply trying to scare people into going along with his plans to raise taxes to pay for senior pensions, healthcare and other government programs.
We do not talk much about the yen, but it will be interesting to watch it (and yen ETFs like FXY) to see whether investors flee or simply discount it as a political maneuver. So far, FXY (quote, headlines) is only slightly lower:
News that a London-based macro forecaster has fingered Hungary as the country most likely to follow in Greece’s footsteps is making the rounds, but so far investors aren’t running for the exits.