Spanish risk premium rises to the 390s

"What we ought to be worried about is the yield on Spanish 10-year notes rising to 5.5% and buyers not showing up," said Unicorp's Miguel Paz one month ago.

The time to worry is here, because unlike what was happening earlier in the week, yesterday public treasury yields surpassed 5.5%, even reaching 5.7% at one point during the day's session, and investors don't see this as a buying opportunity. As a result, the Spanish risk premium that compares risky Spanish debt to safer German debt, reached 390 basis points. This is the highest level it has been since November. Several days ago, Olivier Larouziére, a fixed income manager from Natixis AM said, "The only way to invest in Spanish debt now is to buy for the near term."

So what changed recently? Why are investors not biting on the 5.5% yields on Spanish debt? First, yesterday the Treasury was disappointed with their issue of three-, four- and eight-year notes, because it was forced to pay higher interest rates than it wanted to in order to place that debt. Specially, bond yields were 2.89%, 4.31% and 5.33%, respectively. By way of comparison, these yields were 2.44%, 3.37% and 4.83% when the Treasury last issued these notes.

Further, the Treasury did it when there was less demand and, as if that were not enough, it's not as if costs were any higher because the bid-ask spread shrunk, because they ended up raising 2.59 billion euros. That is to say, the lower end of their target, which was between 2.5 and 3.5 billion euros.

To the Treasury's credit, it has to be pointed out that other factors besides the lack of demand could have influenced the disappointing debt issue: the government?s diminished need for financing. We have to take into account that in the first quarter the Treasury raised 43% of what it needs for 2012 and did so at lower interest rates than previous sales.

Some of the sold debt, especially the portions that ended up in the hands of Spanish banks that have taken advantage of three-year notes at one-percent interest in order to buy debt paying five-percent interest. This technique is known as a carry trade in financial argot.