When the Bond Market Takes a Shine to Spanish Debt

by Tim Dohrmann

This might fly in the face of what you’ve heard…but a holiday can be an investor’s best friend.

Sure, when you switch off for a week or two, you might stress about missing business or investment opportunities.

But the markets have a funny way of not collapsing when you take time out.

It’s liberating to clear your mind of the ‘white noise’ that makes up about 99% of all financial news.

And when you step away from it all, valuable insights can strike.

At the very least, you get a fresh perspective on the bigger picture and investment themes.

That’s what I’ve found after spending the second half of August zipping around Europe. Here’s my take on two of the clearest trends I observed.

Out of the basket

I don’t know how Spain does it. Unemployment is close to record highs at nearly 25%…much more so amongst young people.

You’d think Spanish people would be clutching for any employment they can find, and be desperate to do business.

But that’s not the Spain I found two weeks ago.

Try buying some groceries or paying a bill in Spain between 3pm and 7pm. You can’t do it. For Spaniards, siesta time is sacred. Everything shuts down.

It’s hard for an Aussie to understand. I’ve been to Spain six times now. I still can’t figure out how they get anything done…let alone grow the economy.

But part of what drew me to Spain is the same thing that keeps the country mired in economic strife.

It’s the weather. It’s sensational. Far too nice for you to want to lift a finger.

Even in the grip of a multi-year slowdown, the Spanish way of life…honed over the centuries…is so pleasant, that efforts to change it from Berlin or Brussels are largely futile.

To be fair, mine was only a tourist’s perspective. But despite the slow pace of business (or perhaps because of it), life went on…and the Spaniards seem happy.

That might be why it’s taken Spain so long to recover from the economic slump that hit Europe in the first few years of this decade.

Slowly but steadily, Spain’s economy has come back from the brink. The best indicator of that is the investor appetite we’ve seen this week for 50-year Spanish government bonds.

In case you missed it, European bonds have rallied hard over the past few months. As bond interest rates have fallen, the markets have gotten so enthusiastic that investors are now clamouring to lend the Spanish government euros for half a century at just 4% per annum.

As my colleague Kris Sayce noted, ‘who says you can’t ‘solve’ a debt and interest rate problem by offloading it 50 years into the future?’

You might think issuing more debt to solve a debt problem is kicking the can down a road.

But the falling rates are cutting Spain’s interest expense relative to the ‘firepower’ it gets from raising these billions of fresh euros.

As a rule of thumb, institutional bond investors aren’t stupid. They won’t buy debt if they think the issuer can’t make the promised interest repayments.

And by demanding bonds of such long duration at such low rates, smart investors are signalling that they can see Spain’s economy surviving and thriving far into the future.

Everything seems nicer in the sunshine, even an economic system on life support and resistant to change.

But add this week’s news from the bond market to my observations on the ground. Is Spain’s economy about to emerge from the basket?

You can’t expect things to grow too quickly…it is Spain, after all.

But when the bond market takes a shine to Spanish debt, it’s likely to be good news for Europe…and for stocks.

Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator

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