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 percent last month to 4.706 percent. However, the fact that primary market borrowing costs were below where yields in the secondary market–they started at over 5 percent 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: