Wednesday, 21 January 2015

Investors rush to low Spanish bonds as EU QE plan looms

Global investors predicting large-scale European Central Bank (ECB) bond buying this week rushed in to Spanish debt this morning in a surprising show of confidence.

Spain opened one of its largest ever bond sale at a record low rate Wednesday morning, attracting a reported €23 billion ($34 billion) from across the globe.

Last year, Spain paid close to 4% to borrow money for 10 years. This morning, according to the Financial Times, it paid only 1.66%.
Although Germany and France appear to be politically playing the expected quantitative easing (QE) programme down, peripheral states such as Spain and Greece most affected by the festering economic crisis stand to benefit from billions of new funds potentially entering the currency union.

After weeks of playing with the idea of organising some variation of QE in the Eurozone, investors are showing early fresh interest in parking money in the troubled European Union.

This new demand is already pushing yields down to historic lows and encouraging Spain and others to lock in the low rates.

It is unclear yet whether the international sentiment indicates a widespread feeling of renewed financial security in the EU. This would be a welcome reprieve from years of low growth and a stuttering economy struggling to build back from the pain of 2008.

Harbour Asset Management director Christian Hawkesby says the prospect of the ECB providing more stimulus underlines that New Zealand’s economy, by comparison, continues to be in good shape.

“The New Zealand dollar has remained elevated largely because, in the economic beauty contest, we continue to be one of the least-ugly cases.

“The key for New Zealand investors will be in watching the difference between what the ECB announces it will do, and what the details are. That’s the immediate focus,” he says.

But the longer term attention will be in assessing whether the quantitative easing (QE) plan will truly help turn around the EU economy.

He says the prospect of European QE at the end of 2014 held bond yields down globally causing investors to look elsewhere for a secure yield in a defensive, high dividend share market. New Zealand was a “very popular destination” for that type of investment flow.

“But to the extent that people believe the ECB could be successful with this QE programme and encourage much-needed growth, then the focus could switch to investors looking for more growth oriented opportunities.

“New Zealand isn’t traditionally a growth market. So as a result, investors could begin to look at Australia instead where growth opportunities are more likely, particularly if its non-mining sector starts to take shape,” Mr Hawkesby says.

Analysts remain sceptical that the proposed money injection will fix the long-term crisis.

ECB president Mario Draghi has publically defended the idea of QE. To achieve the EU’s medium-term inflation target of around 2%, the bank must “keep interest rates low and must work towards an expansionary monetary policy which accompanies growth”.

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