Spanish bond soars 200 basis points even as the ECB keeps buying

Spanish bond soars 200 basis points even as the ECB keeps buying

The yield on Spain's ten-year bond hasn't been this high since 2015, and in just a few days it has returned to 2014 levels. The German benchmark has gone from -0.5% to 1%, and the US yield is already above 3%. And all of this, as the opening point of this discussion stressed, with the ECB's purchase programme not yet fully wound down. It does look ugly, yes.

The sequence matters: first the yield spikes, then the end of cheap money arrives. The chart shared in the analysis shows that, since 2015, the only relevant buyer of Spanish debt has been the ECB, according to one participant's reading. The blue bars are purchases; the negative ones, sales. The black line is issuance. Almost everything else is silence.

What it means that the ECB is the only buyer

The argument underpinning the conversation is uncomfortable: if the central bank stops buying, who is going to want ten-year bonds at 2%? One participant posed the question and nobody answered it with names. In 2013 the bond hovered around 5% or 6%, and it didn't look appealing then either. Now 2% seems like a bargain compared with what's coming, or a one-way ticket to the bonfire.

Some argue that the ECB cannot raise rates without killing the southern countries. Spain's structural deficit and its dependence on QE paint a picture in which tapering is a direct threat, according to this thesis. The dominant thesis in the thread: the years of free money will be paid for with cuts, taxes and privatisations. Someone will pick up the tab for the party, and that someone will certainly not be the one who threw it.

The risk premium is back on TV

The question hanging in the air is whether we will see the risk premium back on the news. The implicit answer is that it is already coming back, though under another name and with less drama. The spreads of the peripheral countries are widening at the same time. Germany rises, the US rises, and Spain rises more. The differential shows no mercy.

The technical detail that slipped into the conversation: the pandemic emergency purchase programme (PEPP) and the asset purchase programme (APP) will stop net purchases in June, but redeemed principals will be reinvested. The Fed, on the other hand, will start shrinking its balance sheet in July at 47.5 billion dollars a month, a figure that will double in October. The tap is being turned off from both ends.

The scenario nobody wants to name

The word recession appears cautiously. The point is made that central banks and governments don't say it out loud because pricing it in would trigger a chain reaction: consumers would stop spending, and anyone planning to buy a house or a car would put it off. The result would be to bring the recession forward by a few months. Better to keep quiet and carry on.

The most pessimistic scenario doing the rounds speaks of systemic bank failures, defaults by first-world countries and a "Big Reset" that would sweep away savings. There is no evidence to back that roadmap, but distrust of the official narrative is the fuel. The comparison with the dot-com crisis and the property bubble falls short, according to some.

The analysis gets stuck right here: nobody knows whether the ECB will hold out without buying or will return to the rescue in disguise. Rates, meanwhile, still aren't rising. The bond, meanwhile, is still running wild.