Traders continue to eye the Euro ahead of tomorrow’s highly anticipated Spanish bond auction.  The auction, the first since Prime Minister Mariano Rajoy admitted to the country’s difficulty in accessing funds, will highlight the treasury’s attempts at garnering 1 to 2 billion euro in funding.  This event will also be the first time since the country’s has accessed global investment markets since similar auctions in early April.

Given the rising attention being placed in the Spanish economy over the last two weeks, in particular the country’s benchmark bond yields, euro traders will be especially concentrated on two main things – the bid to cover rate and the amount of offering allotted.

The bid to cover ratio is extremely important in gauging future interest in the country’s additional auctions.  Previous European auctions have fallen below the 2 times supply demand benchmark, but not that much further.  In this instance a bid to cover below 2 times, and even closer to 1.5 times, would deem the auction a failure and confirm the fact that the country’s will be locked out of gaining further funding from global investors.  The notion would boost speculation that the country’s only way out will be through a request of a EU bailout.

Subsequently, a low bid to cover would confirm a low offering amount in the auction – in other words, not enough demand to cover the benchmark bond supply.  Lower demand is likely to prop up offered yields, sending the 10-year paper to yields higher than 6%.  The result would boost on-the-run notes closer to 7%, increasing the outcome that Spain will be unable to make good on its debt obligations like previous examples, Ireland, Portugal and Greece.

All in all, the Spanish government’s failure to conjure up enough demand interest in tomorrow’s auction would be enough impetus for Euro bears to reignite the trend lower.  The sentiment is likely to turn the investment community’s focus back to Germany and its role of EU fiscal unification ahead of the Greek elections in mid June.

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