In the crazy world of government bonds, some nations are getting paid for the privilege of borrowing money, while others are experiencing schizophrenia as yield behavior bears no relationship to the strength of their economies. Somewhere in this mixed-up mess, investors just made a trade that sums up what happens when central banks eliminate the price-discovery function markets are supposed to serve.
Spain announced today that it has borrowed 1 billion euros ($1.3 billion) in the bond market, money that it won’t have to repay for half a century and for which it is paying an interest rate of just 4 percent. That’s not a typographical error: Spain, which Moody’s Investors Service rates a full eight levels below the top Aaa grade, has borrowed 50-year money at 4 percent.
In context, you could argue that’s almost double what an investor can get for lending to Spain for a decade at current yield levels, and is better than supplying money to France for two years for free, or paying Germany for the privilege of lending to it for a couple of years:
Nevertheless, it’s not that long ago — a bit more than two years — that Spain was paying almost double today’s 50-year rate for its 10-year money; the benchmark 10-year yield peaked at about 7.5 percent in July 2012, just before European Central Bank President Mario Draghi saved the bond world by pledging to do “whatever it takes” to save the euro.
You have to admire Spain’s chutzpah. Among the Oxford English Dictionary’s definitions of “opportunistic,” I found this gem: “Of a species: especially suited to unexploited or newly formed habitats” and “characterized by poor competitiveness in relation to other species.”
That sounds like a pretty good ecological echo of the bond world at the moment; where a country’s fiscal health has little bearing on how much yield investors demand to buy its bonds, and cheap central bank money has distorted the market environment to transform it into something unfamiliar — and disturbingly hospitable to the likes of Spain.
When you can borrow money for so long and so cheaply, where’s your incentive to undertake economic reforms? Where are the bond vigilantes when you need them?
Mark Gilbert is a Bloomberg View columnist and a member of the Bloomberg View editorial board.