The success of these auctions may hold the key to where the stock market, as well as the fear level, are headed in the weeks to come, says MoneyShow’s Jim Jubak.
For the week ahead, keep your eye on bond auctions, especially in Italy and Spain.
If you remember on April 10, we had a big, big sell-off in the market because there had been problems with a Spanish bond auction and they hadn’t gotten as much sold as they wanted, and the yields were higher. Well, the Italians are selling a lot of bonds pretty much every day for the rest of April. The Spanish are selling bonds too—a lot of opportunity for another replay of that April 10 event where an auction doesn’t go as expected.
What we’ve already seen is that Spain, which is really the major worry—even more so than Italy—yields on the Spanish ten-year note have gone up almost a full percentage point from March 2 through April 11. That’s the wrong direction…6.5% was where we were in December 2011, when the crisis was so hot. So if we’re back to 6%, we’re worryingly close to that crisis level, and that’s what people are watching.
So what we’re going to be looking at here is a big, big calendar of auctions and the reaction to that, when pretty much as far as we can tell, the main buyers that were working to lower the yields on these bonds—European banks in Italy, the Italian banks in Spain, and Spanish banks—they were doing most of the buying.
What they were basically doing was taking the money that the European Central Bank made available—$1 trillion worth of lending facility—they were borrowing from the ECB and then buying Italian and Spanish bonds. Well, they’re pretty much tapped out, and there’s not a whole lot of new money floating around.
So the question is now, how high do yields have to go to bring anybody else into the market? Certainly during the rally in the bond market, when yields went down and prices went up in January and February, it didn’t bring in any foreign investors. Almost all of the buying remained domestic.
So what you’ve got here is a problem with a lot of new issuance and no real consensus on who the new buyers would be. And that’s why if you keep an eye on these auctions, you’ll have a good chance of figuring out where the stock market, where the bond market, and where the fear versus hope index is going to be over the next few weeks.
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