Abominable Snowman

In the wake of the very numerous recently reported sightings of the peripheral contagion yeti over the last couple of weeks, a brief glance at the available evidence proving the existence of this beast might be in order.

On the left, readers might note that the amount of Spanish sovereign debt in the vaults of foreigners continues to approximately keep pace with increased issuance. As of the end of April, the great undifferentiated mass of guiris is the lender of record of 53.69 percent of the total circulating.

But this easy soaking up of Spanish encumbrances has not been tit-for-tat right across the curve. Again on the left, readers can see that the benightedly fearless foreigner has vastly increased his appetite for short-dated paper. In percentage terms, foreign holdings of outstanding letras del tesoro have increased from 12.76 to 55.11 since the end of 2007. The progression for bonos and obligaciones over the period has been from 42.64 to 54.26 percent.

This change in tastes must be of some concern to the people at the Tesoro - from whose figures these charts are derived. Despite this switch in preference, they have been attempting to maintain the average term of their outstanding debt at something just shy of 7 years. The natural and inevitable result of this conflict between the desires of lenders and borrowers is that the yields on long bonds - from 10 years and out - have recently been setting, if marginally, euro-era maxima. Five years and under, the super stressed zone on the Greek curve, have not.

With regard to contagion, a glance at one symptom of the disease is worth the effort. On the left is graphed the yield differential between the 10-year and the 2-year for Greece, Spain and Germany. Presumably, the previously described state of affairs is serving to 'unnaturally' steepen the Spanish yield curve. But the abominable snowman hasn't shown up yet.






As an aside, Alphaville today made mention of last week's not totally successful issue of obligaciones, referring to it as a 'busted' auction - quite clearly avoiding using the word 'failed' by at least a millimetre. Unfortunately for their take, however, the very piece in which it appears sheds some light on why Spain shut the door short of midway between their expected and maximum targets - upsetting markets in the process. The cited DB report makes mention that Spain has already issued 16 billion euros over its actual funding requirements to date this year. There's a message there for fishers of yield.

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