Position in Europe: Long Germany (EWG)
For a fourth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 4/6, to take the total program to €214 Billion.
February-to-date the Bank has purchased a mere €210 Million versus €2.2 BILLION in the week ended 1/20, and €3.8 BILLION in the week ended 1/12.
While the Bank has been in a wait and watch pattern, European capital markets are far from still. As a risk signal, sovereign bond yields for the Spanish and Italian 10YR maturity are trading up 100bps and 84bps month-over-month to 5.95% and 5.61%, respectively.
While there are other channels to suck up sovereign bond issuance, including funding from the two 36-month LTRO programs, the SMP’s lack of buying may send a negative signal to market participants. This has perhaps been witnessed in recent weeks by sovereign auctions in which average yields were priced higher than previous auctions. This is an inflection versus February and the first half of March in which most European bond auctions went off with lower yields than previous issuance.
Europe’s response to its sovereign and banking “crisis” remains a reactive one. There's been no increase to the collective size of the EFSF and ESM, while the inability of Spain to reduce its fiscal imbalances is creating increased market nervousness. Should bonds yields continue to break out, we may see the ECB get involved again, perhaps by renewing its secondary bond purchasing.