Has the Spanish Treasury hit upon the right strategy with longer maturities?

Interest on the 10-year bond has fallen to just 1%; the 7-year to 0.63%, with the 5- year standing at just 0.38%. Last Tuesday, Treasury bills were issued at zero cost.

The authorities’ strategy can be summarised in two points: to issue bonds at slightly faster than expected rate with much longer maturities. Since the beginning of the year, bond issues have attracted €45.7 billion, 32.2% of the expected total for the medium and long-term over the whole year (€141.9 billion). The average issuance cost stood at 1.10% at the end of February 2015, compared to 1.52% in December 2014.

According to experts, issuances are somewhat faster than last year  (going from 23% to 32.2% today), but the big difference is maturities: in 2014 maturities of more than 10 years accounted for 45% of the total, while so far in 2015 they have accounted for 75% of the total.

Has the Treasury hit upon the right strategy here? Yes, considering that the 10-year bond cannot fall much further, which means the State is minimising the risk of refinancing.

The amount allocated in the first bond auction since the start of QE amounted to €4.5 billion. The largest amount, of €2.6 billion, focused on the 10-year bond. The drastic reduction in interest yields did not dent demand. ECB purchase requests have meant the coverage ratio for 10 year bonds currently stand at x2.

The ECB’s recently launched QE involves €60 billion bond purchases per month throughout the whole of the eurozone until at least September 2016. The purchase of Spanish bonds could be up to €5.3 billion per month, approximately 15% of the total.

These are merely forecasts. What will actually transpire may prove different if the ECB encounters serious constraints in the debt market, which may inhibit the programme achieving the overall desired result.