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Spanish Bond Yields Continue To Fall

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Spanish Bond Yields Continue To Fall

Spain is back to the market in a series of Government bond auctions this morning and yields have continued to drop. 3 year bonds sold at 1.022% against market expectations for a yield of 1.331%, the 5 year issue was bought at 1.663% on expectations for 1.869% and the long term 10 year sold for 3.059% against a 3.291% expectation.

Evidently there is plenty of demand for these debt instruments despite Spain’s weak economic fundamentals. Spanish national debt is running at 93.90% of GDP, growth is flat and unemployment is currently above 26%.

European bonds across the board however are experiencing a surge in buying interest brought on by the European Central Bank’s statement earlier this month that it will embark on a further round of monetary stimulus. Many Eurozone countries are taking advantage of the demand in the market to replace expensive debt. More to the point many of the economically weaker nations are undertaking new issues in order to create cash cushions regardless of whether there is an immediate need for the funds or not.
Investors are happy to take on the debt of riskier nations in order to gain exposure to a broad portfolio of Eurozone bonds. The upside is that the ECB will introduce a quantitative easing program that would see it buying up member country bonds in the secondary markets and consequently driving the yields higher. Failing this the plan B portion of the bet is that the ECB will continue to lose it’s fight against falling inflation and this will see the relative aspect of the bond yields improve.

All in all this produces a win-win situation for both debt issuers and debt buyers. Spain, just as Ireland and Italy have done, is simply taking advantage of a distorted market to access cheap cash on a precautionary basis. It is logical to expect further rounds of debt issues from Euros periphery nations over the coming months.

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