Early this morning I was watching yields on European government bonds. Italy and Spain were lower. I was wondering if the ECB had stepped in. However, in what will be billed as a “successful” auction, rates headed North.

At 8:02 AM Reuters reported Italy,Spain bonds stabilise on ECB support speculation.

Italian and Spanish bond yields came back off 14-year highs on Thursday due to a well-bid Spanish debt auction and speculation that Japan’s intervention to weaken the yen will inspire the ECB to revive its dormant bond-buying programme.

“There’s been speculation the ECB’s waiting in the wings to calm the market, which we think it is highly unlikely,” Citi interest rate strategist Steve Mansell.

“The ECB is going to be a very reluctant participant to any kind of market turbulence that’s a direct result of sovereigns not stepping up and doing the required amount in terms of fiscal adjustment and negotiating more credible support packages.”

That is a vastly different tune than we heard yesterday from Citigroup Chief economist Willem Buiter who said “The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn’t come in, the Italian bond auction is likely to fail.

My reply to Buiter was harsh: “The act of intervention will not turn a failed auction into a successful one. What the hell is the matter with chief economists who do not understand simple economic principles?”

“Eye-Watering Yields Following Successful Auction”

At 7:54 AM (different writer), Reuters had this story to tell: Yields jump at Italy bond auction

5-yr yield rises to 4.93 pct highest since June 2008
15-yr yield highest on record
Italy sells 4.97 bln euros of bonds vs max target of 5 bln

The premium investors demand to hold Italian 10-year bonds instead of safe-haven German Bunds rose above 300 basis points after the sale, from around 294 basis points before the auction.

That spread widened to a euro lifetime high of 353 basis points on Tuesday, before narrowing back as moves by the Italian government to speed up passage of a 47 billion euro austerity package helped calm markets.

Still, current levels compare with a spread of 220 basis points a week ago, before the market sell-off started.

“A look at the outright yield levels is eye-watering,” said David Schnautz, a rate-strategist at Commerzbank in London.

“While the auction will most likely be spun as a success, there are some worrying signs and Italy won’t be able to continue to have debt auctions like this indefinitely,” said Kathleen Brooks, Research Director UK EMEA at Forex.com.

Italy 10-Year Government Bonds

Spain 10-Year Government Bonds

How Much More “Success” Can the ECB Take?

Please note that yields in Italy are about to surpass Spain.

The only thing “Successful” about the auction was the ECB did not intervene. I am now wondering: How Much More “Success” Can the ECB Take?

Mike “Mish” Shedlock
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