Debt markets’ rally triggers bubble concerns

The action mix announced by ECB has extended the debt ‘rally’. Spanish 10-year bond has reached historic minimums, already below American 10-year Treasuries, and premium risk is moving around 120 bp, back to May 2010 levels, when former PM José Luis Rodríguez Zapatero was forced by Brussels to pass aggressive spending cuts.

This Spanish debt performance is a direct consequence of Mr Draghi’s measures. However, it doesn’t comply as it should, with economic principles.

The ECB’s decisions guarantee an extensive term of low interest rates; TLTRO’s four-year period makes it less necessary for banks to sell public debt in order to get liquidity. In addition, entities will pay for the deposits in Frankfurt, which encourages them to acquire other types of assets.

Therefore, liquidity injection prompt short term public debt buys. Hence the commonplace forecast of Spain’s premium risk reaching 100 pm and standing even below. This would mean being close to the German economy.

 Are Spanish public debt levels reasonable? Not at all if just economic principles are considered. It is true that the Spanish GDP quarterly grows by 0.5% and job figures are improving, but we still have 6 million unemployed and are far from our potential growth. Our economic basis is not sound enough to justify 10-year bond in all-time minimums.

Investors know all these figures, but they also now that thanks to historic low interest rates Spanish debt remains attractive. Less and less, though.

 

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