Two thirds of the 47 fund selectors attending EIE’s second conference of the year believe the current spread of just over 100 basis points between Spanish and German government bonds is not justified. Though Spanish government yields recently dipped below 1.5% for the first time in history, and have contracted by more than 2 percentage points over the past year, bond managers speaking at the event are convinced they will probably go down even more.
“It is right that the current spread between Bunds and Spanish government bonds is not justified. It should be even tighter than that, said Fabrizio Quirighetti, head of fixed income for Syz & Co, a Swiss-based asset manager. “The Spanish economy is improving, and people tend to forget that before the crisis there was a time that the Spanish 10-year bond yield was lower than the German one. I think the [Spanish 10-year] bond yield should rather go to 50 basis points, or even lower than that.”
Christopher Nichols of Standard Life’s GARS fund was almost as optimistic as Quirighetti. “I think this low spread should be taken as a measure of success, that Spain is no longer in the same camp as the rest of the Club Med,” he said. Congratulations Spain, you are no longer in a dangerous position!”
Or irrational exuberance?
Gordon Harding (pictured), a corporate bond manager for M&G took a slightly more balanced approach on the issue. “Obviously there is a big technical bid out there for government bonds, and that justifiably means that people are going to be reaching for a bit of extra yield,” he said. “From that perspective we can the spread tightening even further but, arguably, given some of the political risks involved, it should probably be wider over the longer term.”
Fund selectors attending the conference indeed realised that Spain still has a long way to go on its economic recovery and that caution is warranted. Although the country has exited its recession and unemployment is falling, annual GDP growth remains muted and unemployment is still at 23.7%. Only two years ago, the Spanish government had to request a €41bn eurozone bail-out for its troubled banks, while a leading Catholic charity released a report last autumn saying a quarter of Spain’s population now lives in poverty. On top of this, hundreds of thousands of young Spaniards have left the country since 2009 due to a lack of perspective on the job market, while the Syriza-like anti-austerity party Podemos is set to become a major political force after the parliamentary elections scheduled this year.
The crowd does not expect the ECB’s newly announced QE programme to significantly boost bond prices. A staggering 89% believe it will primarily benefit equity markets, while only one in nine expect bonds to be the main beneficiary. None think it will actually benefit the real economy…
Click here to see a full breakdown of the event voting data.
Click here to see a slideshow of photos taken during Expert Investor Barcelona.