Spanish yields are a paradox.

They fall because the market believes they will ask for ESM support. However, once they fall, the government no longer feels like it’s necessary to ask for aid.

Spanish 10-year yields are at a three-day low, down 18 basis points to 5.71%. The line in the sand to watch is 5.50%.

The fall in yields is helping EUR/USD.

Most observers think it will be a spike in yields that forces Spain to ask for aid. That type of scenario would EUR-negative as yields rose (perhaps challenging 1.27/28 with yields near 7%) and then EUR-positive after they ask for aid.

To me, that might be plausible but I suspect the bond market wouldn’t be so easily fooled unless there is some kind of political proclamation from a Spanish leader saying they will not take aid.

I think politics is the place to watch ahead of the mid-October EU Summit (where Spain is likely to make the request). If German and French leaders sound like they want to force Spain to take the aid, it’s EUR bullish.