Spanish auction boosts market

A solid Spanish bond auction, a slightly more optimistic ECB and robust trade data from China all helped to offset some disappointing corporate results.

Spain has a daunting funding requirement for 2013 - it is aiming to raise €71 billion in net terms - and today's auction across three different maturities was the first test of investor appetite.

However, the sovereign passed with flying colours, the €5.82 billion sold easily, beating the maximum €5 billion target. Bid-to-cover ratios were decent and yields on the 2015 and 2018 bonds were both below the previous auction levels. The 2026 bond received solid demand and a relatively respectable yield of 5.55%.

The collective action clause on the 2015 issue didn't deter investors, perhaps an indication that the markets see a restructuring of debt as a slim possibility. The ECB is of course ready to intervene at the short-end via the Outright Monetary Transactions programme, though today's successful auction probably means an ESM bailout is not on the near-term horizon.

Whether this level of investor demand can be maintained throughout 2013 is another matter. Spain's CDS rallied 14bps to 248bps, its tightest level since June 2011.

The ECB hasn't had the opportunity to activate its OMT programme yet, and today it refrained from cutting interest rates. Mario Draghi highlighted the tightening in sovereign CDS, as well as low stock market volatility, as positive developments towards "financial normalisation". However, he reiterated that risks to the economic outlook remain on the downside.

An earlier fillip was provided by trade data from China. Exports rose by 14% in December, far higher than the 4% consensus estimate. Imports, up 6%, were also higher than expected.

In the corporate world, Marks & Spencer was a notable underperformer after it issued a downbeat trading statement. The UK retailer was forced to release the statement early after it was leaked to the press. The results weren't impressive, with sales of general merchandise and food both below expectations. M&S spreads widened 10bps to 185bps.

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