After Spain was forced to pay six-months’ interest to investors in return for placing Letters, the debt market turned around. After having accumulated debt for more than seven years, the State now has to take on this trend. This is due to the European Central Bank’s (ECB) policies, which were focused on the acquisition and financing of public debt in a low interest rate environment. Until now.
The landscape is rapidly changing and the forced rate of change can be seen in just a few weeks. The ECB announced the first rate increase since 2014 due to the escalating inflation -more then 10% in Spain and more than 8% in Europe, according to Eurostat. Investors are now demanding interest in countries such as Spain, which is a change from the years when the Treasury was able to finance itself without charge.
According to data released by the Bank of Spain, the Public Treasury placed Tuesday 5,333 million euros in letters at 6 months and 12 month, respectively, within the expected medium range. It also began to pay investors for the 6-month referee for the first time since September 2015.
Despite rising rates, investors still show interest in Spanish debt securities. The combined demand for both references has exceeded 10954 million euro, more than twice what was awarded to the markets.
The body dependent on the Ministry of Economic Affairs placed 1,149,000,000 euros in six-month letters against a demand of 3184 million. The marginal interest rate was set at 0.13%, as opposed to the negative interest of +0.05% in the June auction. It has placed 4,184,000,000 letters in 12-month letters, less than the 7,770 million investors requested. The marginal return was 0.70% compared to the previous 0.50.
Recent auctions have seen the Treasury having to pay more investors for debt securities. This coincides with rate hikes by Fed and announcements of an increase in the price money by the ECB. The Fed has already stated that it will begin the path of increasing rates in July. It also comes at a moment when the yield and risk premium on the 10-year bond is rising.
The European Central Bank announced in July that it will start flexible reinvesting bonds that were acquired during the pandemic. This is to contain, if needed, risk premiums.
The Council of Ministers will also see Tuesday’s report from the Public Treasury. It confirms that the average debt life has increased while refinancing requirements have been reduced as well as the interest rate on debt currently in circulation. These are two conditions that in principle can partially ease the new phase of rising rates.
On Thursday, the Treasury will host an auction for State bonds. The public body anticipates that it will award between 4,250 and 5,750 millions euros. This will be an opportunity to examine the state of public debt. The Executive is already planning for 2023.
This Tuesday’s stock market session saw investors demand interest on the Spanish 10-year bond at close to 2.4%. However, the risk premium, which is the difference between Spanish and German bonds, fell to 109 basis point. Two weeks ago, the premium was over 150 points. The bond rose to 3.3% due to tensions caused by inflation.
