Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

(Corrected )

Tricky time to hold a Spanish government bond auction, just 30 minutes after Catalonia's independence crisis went to the next level of brinkmanship. But Europe's bond market seems to have learnt its lessons from the crisis, and the buffers built into the system look like they're preventing a rout. 

Thursday's 4.52 billion-euro ($5.34 billion) sale of debt in maturities ranging from four to 29 years was not a train-wreck. What mattered more than the schedule was the set-up going into the sale. 

Spanish primary dealers benefit from a greenshoe option, which allows them to buy another 24 percent of their allocation two trading days later -- at the same price. Government bond prices fell before the sale, giving dealers more scope to submit bids above market values at the auction. For the benchmark 10-year slug of 1 billion euros sold, average prices entered were 27 cents above the market price at the auction deadline. 

Knock 'Em Down, Bid 'Em Back
Spanish bond prices benefit from the buffers that help auctions go smoothly
Source: Bloomberg

If a calmer political environment prevails over the weekend and bond prices are even higher, dealers will be able to add to their allocation at the lower price they'd paid Thursday. This carrot encourages the market keep to a smooth course, and can help keep bond auctions from turning into disasters while political turmoil rages.

It's worth remembering that the dealers themselves have a stake in having the auction go well. Spain, like many European governments, also raises money in the syndicated bond market. The banks that tend to get those mandates can turn out, funnily enough, to be the very ones who are more active in the auctions. 

Other corners of the European bond market show investors haven't panicked. Spanish yields have only widened two basis points over German debt now that Prime Minister Mariano Rajoy will proceed with suspending Catalan autonomy. The worries were already priced in, given that the debt had already widened 30 basis points since June. 

It's not that investors are complacent. The key benchmark for Spain is Italy, and a comparison of yields shows investors are getting relatively more comfortable with Italian exposure.

Peripheral Comparable
The premium that Italy pays over Spain is shrinking as the Catalonia crisis worsens
Source: Bloomberg

Redemptions of 24 billion euros at the end of the month are also going to smooth any selloff, as Gadfly has pointed out. As 70 percent of Spanish government bonds are held domestically, this money is largely going to be re-invested.

Furthermore, the overarching presence of the European Central Bank's QE programs ensures that any repetition of the types of sell-off seen during the 2011 crisis is increasingly unlikely. The central bank's capital key formula means Spain comprises 12.6 percent of the monthly 60 billion euros of bond-buying. That equates to more than 7.5 billion euros -- nearly twice than was sold at Thursday's auction. Even if the ECB may soon start the tapering process, its bond-purchase programs are going to be around for another year. And backstops will surely be in place when QE's time finally ends.

Crisis Perspective
Spanish yields are off their lows, but the damage from the Catalan crisis is no comparison to the rout when the European debt crisis raged
Source: Bloomberg

Spanish yields will surely head higher if the Catalonian independence crisis deepens, but it will be a controlled affair instead of a headlong charge into panic. The system has been well-designed to prevent this. Europe has learnt its lessons on managing bond market woes. Whether that can be said for its political woes is another matter.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects maturity of longest bond in second paragraph.)

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net