The shots of the European Central Bank (ECB) they are hitting the target. Despite the fact that macroeconomic forecasts worsen day after day, investors now demand peripheral bonds a much kinder return than just a month ago. In the case of Spanish papers, the ‘de-escalation’ is no less than 42%.
The market demands now a return of 0.69% to Spanish bonds. Only a month ago, they were not satisfied with a yield of less than 1.2%. Fixed income managers do not hesitate to point out the role that the ECB has played in this progressive fall in yields while the economic outlook remains very similar and even more uncertain than then.
The launch of the new ECB debt purchase programs -and an acceleration in which they were already in force– has resulted in a greater demand for these peripheral papers, which are also the managers’ favorites. This preference is mainly due to the fact that they provide a higher return than those issued by the central economies, which even in this uncertain scenario continue to trade at negative rates.
The target in the outbreaks of the epidemic
The scenario is repeated in other roles in the region, such as the Italians or the Portuguese. The bonds issued by Rome have seen their profitability fall by 30% in the last four weeks, until staying at 1.59%, which, however, continues to place them as the most profitable in the entire region. Those issued by the Portuguese Treasury also appear to benefit from the country’s success in containing the epidemic, as their yields are now 47% lower than a month ago.
Although the ECB has not made public the distribution of the purchases of its Pandemic Emergency Purchase Plan (PEPP, for its acronym in English), the rate at which it is consuming the 750,000 million euros with which it was born on March 19 clearly points in the direction of the countries most affected by the epidemic. Both on a sanitary and economic scale.
The emblematic Plaza de España in Rome, deserted by the coronavirus.
In this sense, the data of the PSPP program (Public Sector Purchase Program) that is public reflects that more than a half of the 26,759 million euros that the institution allocated in April to the purchase of sovereign bonds went to Italy and Spain. Specifically, the transalpine country received 41% of this amount, while Germany only received 16% of these funds.
These are the figures that have fueled the rise in prices and lower profitability of bonds in the European periphery. The old aphorism is confirmed that in the market that numbers are worth more than words. After the verbal stumbling block of Christine Lagarde, when in March she stated that the risk premiums were not “work” of the institution she presides over, the commitment shown with the acquisitions balance sheets she is publishing have had an even more marked effect on the bond yield.
Recovering from stumbling
In this line, Lagarde has not hesitated to emulate the ‘whatever it takes’ (‘Whatever it takes’) by Mario Draghi on more than one occasion since that lackluster French premiere. So much so that on March 12 the profitability of Spanish bonds rose by a drop of 80%. However, the rise was up to 0.48%, significantly below the levels to which it has managed to retreat in the last month.
The recovery in prices – and a drop in profitability – could go even further. Although everything will depend largely on that de-escalation measures do not lead to an increase in infections by Covid-19, the minutes of the last meeting of the Governing Council of the ECB point in this direction. The agency claims to be “fully prepared to increase the size of PEPP and adjust its composition, and potentially its other instruments” if necessary.
ECB President Christine Lagarde.
François Lenoir / .
This hypothetical increase in the scope of the pandemic program is precisely the scenario with which more and more investment firms work. This same Friday the French Axa IM pointed out that if it continues with its current rhythm of purchases, the PEPP would run out of funds “in late summer”. However, the manager acknowledged that in June it would most likely be an upward revision of the conditions of this ‘lifeguard’ for the Eurozone.
Despite the drastic cut in yields, what haven’t fallen as hard are the risk premiums. Barely 22% in Spain -from 155 to 120 basis points-, 14% in Italy and 27% in Portugal. In this sense, it must be considered that the support that the ECB provides to these economies also applies to Germany.
The German obstacle
In this way, the reference German ‘bund’ has managed to deepen its negative returns, up to -0.52% at the end of this Friday. A movement that is not surprising considering that the stimuli deployed have been able to smoothly absorb the announcement of the Spanish Public Treasury to reach a record high for new debt issuance. A height that, in addition, will be reached quadrupling the volume that had previously been planned.
The order of the German Constitutional Court it has not intimidated Lagarde and his team. Although the doubts of the Karlsruhe magistrates add uncertainties in this complex economic scenario, the truth is that the ECB increased its debt purchases by 54% in the same week as the ECB sentenced.
Some financial giants have warned that the institution’s freedom of movement is in question, but for now their darts are targeting.