March 1, 2021

The reasons why investors now pay to buy Spanish debt


MADRID

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The Public Treasury today placed negative interest on a ten-year debt for the first time in its history, that is, investors have paid to buy the bonds. Specific, In this Thursday’s auction, titles have been issued for an amount of 921 million euros with a marginal return of -0.016%. Faced with this scenario, it is worth asking who wants to pay money to acquire debt. However, buying bonds with negative returns may not be as far-fetched as it sounds. Next, we analyze the reasons and the ins and outs of this Treasury operation.

Can you get any benefit from buying debt with negative returns?

It is obvious that if the securities are held until the expiration date, investors with negative bonds in their possession risk losing money. However, many investors buy these bonds with the intention of selling them later and thus making a profit afterwards. There are also institutional investors such as mutual funds that may be interested in buying negative debt to cover other investments or with the motivation to seek a safe haven in times of crisis such as the current one.

Why is it that long-term Spanish debt is trading negative?

The deployment of measures by the European Central Bank (ECB) to face the economic consequences of the health crisis would be behind these quotes. “We think that if it weren’t for the important action of the ECB, it would be unimaginable to think about interest rates to which government bonds are being issued in Spain ”, interprets Germán García Mellado, fixed income manager at A&G Banca Privada.

Does the phenomenon of debt with negative returns occur in the rest of Europe?

The fact that Spain is financed at negative 10-year rates is included within the behavior of the rest of the Eurozone bonds, it is not an isolated case. In this sense, García Mellado points out that Germany offers -0.6% at 10 years and that in Portugal they yield even less than Spanish bonds at the same term, since the interest is now at -0.003%.

Are these negative interests going to be maintained or is it a specific event?

The maintenance announced today of the ECB’s debt purchase programs will support the Spanish Treasury. “This will allow member states to continue financing expansionary fiscal policies to reactivate economies due to the effect of the pandemic,” adds the A&G manager.

How does this benefit the Spanish Treasury?

The benefit is clear for the Spanish Treasury since this way the interests to be paid to investors who acquire debt securities fall. From the Ministry of Economic Affairs and Digital Transformation they argue that with this decrease “the reduction in interest rates on Spanish debt is consolidated, which in November registered new historical lows: the cost of outstanding debt stands at 0, 18% and the rate of the ‘stock’ of debt stood at 1.86% ».

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