The European Central Bank may push the Spanish two-year note yield to as low as 2 percent through its bond-purchase program, said Steven Major, head of fixed-income research at HSBC Holdings Plc in London.
“Two percent would be reasonable for a two-year Spanish bond if the ECB decides it should go there,” he said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “It’s all about getting those front-end yields stapled to the floor,” he said, referring to shorter-maturity debt.
ECB President Mario Draghi said on Aug. 2 that the central bank may buy government debt in unison with the region’s bailout funds to address elevated yields that are “related to fears of the reversibility of the euro.” Chancellor Angela Merkel yesterday backed the ECB’s insistence on conditions for helping reduce borrowing costs, saying Germany is “in line” with the central bank’s approach to defending the euro.
Spain’s two-year note yield dropped 24 basis points, or 0.24 percentage point, to 3.75 percent at 11:45 a.m. London time. The rate is down from a euro-era record of 7.15 percent on July 25, having surged earlier this year amid concern funding needs for the nation’s banks would overwhelm government finances without external aid. The 10-year bond yield dropped eight basis points to 6.44 percent, the lowest since July 4.
The threat of central bank intervention in the bond market is “serious,” Major said today. “One of the big trades for the rest of this year will be the short-dated periphery,” he said. “People are frightened to hear this kind of thing but the chances are that Spanish bond yields will be nearer to 2 than 6 percent in the coming months based on the fact that the ECB is asked to intervene.”
Negative yields on two-year German notes are unjustified and investors should bet against the securities, Major said. The two-year rate was at minus 0.033 percent today, below zero for the 31st straight day.
“The flip side of what is happening in Spain and Italy is really what will happen to Germany,” he said. “Underweighting bunds is also one of the big trades,” he said, referring to a position in which fewer of the securities are held than in the indexes used to monitor a fund’s performance.
Spanish debt handed investors a loss of 3.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German government bonds returned 2.8 percent.