These PIIGS Went to Market

A month into 2012, there’s still ample focus on the PIIGS. After all, as recently as Q4 2011, yields at auction for some maturities of both Italian and Spanish debt were hitting 7%—a level many believed (incorrectly, in our view) was automatically disastrous.

For the two PIIGS still going to debt market (Italy and Spain, the others have been bailed out), where are we now?Debt auctions so far have largely gone just fine, with ample coverage and falling yields.

Italy represents 59% of the PIIGS debt to be rolled over in 2012 and is thus the core eurozone issue in 2012. But it gets past some key funding hurdles fast—by April, Italy will have rolled over 47% of its debt coming due in 2012. In February alone, the country must roll over €53 billion. Early auctions this year have been encouraging—yields thus far on all maturities have moved lower from 2011 peaks, as shown in Exhibit 1.

Exhibit 1: Italian Yields on Key Maturities (Since 12/31/2010)

Source: Thomson Reuters; as of 2/2/2012.

Spain represents a healthy chunk of maturing 2012 PIIGS debt, but must rollover less than half the amount Italy does. And only a month into 2012, Spain’s already addressed a significant portion of their refinancing needs (roughly 46% of debt with maturities greater than one year). (See Exhibit 2.) Spain has no additional debt of significance maturing until July, when €11.2bn of 10-year bonds come due.

Exhibit 2: Spanish Yields on Key Maturities (Since 12/31/2010)

Source: Thomson Reuters; as of 2/2/2012.

Will subsequent Spanish and Italian auctions go so well? Hard to know, but expectations remain very dour, so even mediocre results will likely prove a nice positive surprise—another incremental tailwind for stocks this year.