Spain built a book of over €28bn for a €6bn October 2026 on Tuesday, with pricing set at 95bp over mid-swaps — 7bp inside initial price thoughts released the same morning. Over 400 investors were involved — one of the highest counts for a Spanish benchmark.
Cyprus did just as well on the same day, taking orders of €2.5bn from 182 investors for a July 2023 euro benchmark. It printed the bond at a 3.8% yield, well inside initial guidance of 4% area. The book breakdown also showed the strength of investor belief in the sovereign compared with even just a year ago. Over two deals in 2015, hedge funds took 40% of the first trade and 22% of the second. But in Tuesday's deal, that investor class went home with just 7% of the bonds.
To round off the week, on Thursday Spain showed there was still plenty of demand left for its bonds, as it auctioned three year debt at a negative yield for the first time, set a record low yield for five year paper and cut costs dramatically on a 30 year line. That mirrored an Italian auction last week, when the sovereign hit record low yields in several maturities at a bond auction.
It is all a far cry from the immediate reaction to the UK’s shock decision on June 23 to leave the European Union. Spreads between Germany and the periphery ballooned as Bund yields went south and Italy and company’s rates soared the other way.
That led one senior market official to comment: “Although the focus at the moment is on the UK and rating agencies are threatening a downgrade, I know whose DMO seat I would rather be sitting in at the moment — the UK's. Spain and Italy are in for a torrid time. Europe is about to go through its second existential crisis and the periphery will suffer first.”
Now, spreads are still wider than they were before the referendum result. But while German yields are at record lows — the country sold 10 year debt at a negative rate for the first time last week — the 10 year yields on Spanish and Italian debt are also hovering around their lowest ever levels.
One can easily say that is all down to support from the European Central Bank, and the expectation that it will add yet more extraordinary measures.
That may well be true, although it opted not to do that on Thursday. But what is clear, at least for now, is that investors still have faith that the ECB will be able to provide that support.
In the market’s eyes at least, a second European existential crisis looks some way off.