In the wake of the investiture process of Alberto Núñez Feijóo, the acting Government will accelerate negotiations in the background with potential parliamentary partners called to support Pedro Sánchez in the face of his re-election if the PP candidate fails in his attempt to gather a majority support parliamentarian. The particular auction of seats has begun in public with specific requests from Catalan nationalism such as those of Junts (aministy and referendum), ERC (reductions, greater financing and powers) and other more personalistic ones such as Podemos, which controls 5 deputies of Sumar and p ide . a ministry for Irene Montero.
Faced with this scenario of uncertainty, international investors remain on hold, attentive to the latest movements of the European Central Bank (ECB), which has once again raised interest rates to 4.5% and continues to tighten the interest curve of The bonuses. with the balance reduction process. The latest call for fiscal consolidation in the countries of the euro zone is also causing this effect because it will force public accounts to be balanced to avoid going into even more debt, this time without the guarantee of the central bank and the search for private international investors such as funds or sovereign vehicles, according to experts.
Meanwhile, debt yields mark not only the interest received by investors who buy these assets, but also the cost of issuance and financing by bond sellers. European governments continue to be at the head of this list, among them, the Spanish one. The Public Treasury plans to carry out net issues (new debt) worth 70,000 million euros in 2023 to cover its deficit, just over a quarter of its total annual issuance volume to refinance.
The expectation that this figure falls short due to the increase in the interest burden and the virtual financial commitments that Sánchez’s acting Government is assuming has caused an increase in the cost of debt in the secondary market. The interest on the 10-year Spanish bond closed this Monday at 3.788%, its highest level since March and, therefore, its maximum since January 2014. At 30 years, the yield on the obligation rises to 4.3%, while that the 2-year bond has risen to 3.63% in response to the new framework proposed by the ECB.
What does that scenario consist of? The new mantra of ‘high rates for longer’ defines the ECB’s commitment to remain firm in the face of pressure to lower rates once the economic slowdown is confirmed and real financing conditions tighten even further. After the tenth interest rate increase since July 2022, the authority chaired by Christine Lagarde seems to have reached satisfaction and has signaled a probable pause in the remainder of 2023.
“The ECB has entered the next stage: rate markets are beginning to look beyond the maximum, while macroeconomic concerns guide rates lower and the curve flattens,” comments the team of economists at ING Research. . “This will probably be the ECB’s last rate hike. We see that economic data for the rest of the year will continue to weaken, although we do not expect a significant recession, as growth will remain slightly positive,” they point out from V ontobel.
The Swiss manager also expects inflation to decline substantially, mainly due to the impact of previous rate hikes and base effects. “This is not an environment conducive to further rate hikes, considering that the monetary policy stance is already considered restrictive. Lagarde went on to say that the transmission of monetary policy has been rapid compared to previous tests. This is essentially the “soft” landing we talked about earlier and consequently, given that the ECB is finishing raising rates, there is no recession and inflation will be slower going forward, we believe this will be a favorable environment for assets fixed income,” they add.
According to Felipe Villarroel, manager of TwentyFour AM (Vontobel boutique), “Treasury bonds will benefit from a calmer period as uncertainty surrounding central bank measures decreases, although the room for a big rally is limited by the fact that curves are inverted, but we still think it’s a good backdrop for fixed income products. “Credit markets, we tend to believe that those that look cheap will catch up , while the rest will simply remain well supported.”
Among the most attractive fixed-income securities, Vontobel is betting on financial and banking securities such as hybrid debt such as AT1 and AT2, senior bonds and mortgage securities and securitizations. “The spreads on the latter are still very wide compared to history. However, high-yield bonds probably belong to the second group, with spreads that do not seem particularly cheap or expensive to us,” they add.
Therefore, if there are no more rate increases on the horizon, experts see it likely that investors will seek to secure a seat with current yield levels, especially in the face of a hypothetical rate cut in 2024. “We firmly believe that one of the main drags on the recent performance of fixed income assets, that is, central banks with their fastest raising cycle in decades, is coming to an end. “Well above inflation levels, which could translate into a race by investors to secure those returns,” he concludes in Vontobel.
