Today Spain managed to sell €1.93bn in 3 and 6-month T-Bills, covering its aim of selling between 1 and 2 billion. The rates were as follows:

  1. 3-Month: 0.634%, previous 0.381%, 3M-Euribor: 0.727%.
  2. 6-Month: 1.58%, previous 0.836%, 6M-Euribor: 1.024%.

It is obvious that the 3-month yield settled bellow the Euribor funding cost, while the opposite happened for the 6 month yield. My own interpretation of the results, taking the latest Bank of Spain data into account, is that:

  • Spanish banks are facing large fund outflows in the short-term. Although the outflows are manageable for the next few months, low excess liquidity is pushing them to ask for higher yields even in short-term T-Bills, in order to increase their profit spreads and earn enough interest to eventually pay the ECB (especially since outflows mean they will not even be earning the deposit facility rate).
  • Excess liquidity will probably be drained in the next 6 months, forcing Spanish banks to seek funds in the money market. The Bill-Euribor spread probably represents Spanish banks 6 month funding cost spread (around 55bp), which elevates to 157bp according to the 1Y Bill spread.

It seems that this year’s August will be a (stronger) repetition of last year’s.