Effective rates have fallen by almost one point from the maximum reached a year ago. In October last year, the cost of new issues reached 3.853%, levels not seen since 2011, in the midst of the Great Recession.
The spike in interest on new Treasury issues occurred shortly after interest rates also reached their peaks. It was September 2023 when The European Central Bank (ECB) has raised its benchmark rates to the highest levels this cycle increases – 4% in the case of the deposit facility – after increasing them by 450 basis points in 14 months.
So, for eleven months, the cost of new issues fell by 93 basis points alongside the change in monetary policy. The European institution has already lowered the price of silver twice.
In mid-September, The ECB reduced the price of the currency by 25 basis points, as it also did in June.. And it looks like it won’t stop there. The market expects the guardian of the euro cut benchmark rates again at the October and December meetings due to moderating inflation.
In other words, the market expects declines at the two meetings that will take place before the end of the year. The next one will take place this Thursday. And if the predictions come true, The deposit facility will decrease to 3.25%.
The fall in interest rates and the prospect of them continuing to fall in the future have led to a drop in the yields offered at the latest auctions.
The only exception is three-month Treasury billswhose interest increased this Tuesday up to 3.067%compared to the previous 2.86%. Despite this, the path is downhill.
The profitability of six-month invoices is 2.919%, the lowest percentage since February 2023; that of nine-month bills are 2.848%minimums since January of the same year. The least interest is offered Spanish debt at one year of life: 2.598%the lowest since December 2022.
The reduction in interest offered does not only concern shorter durations. The same thing happened in other Treasury auctions. For example, in one of the latest broadcasts, the organization placed three-year government bonds, at the marginal interest rate of 2.280%, below the 2.535% of the previous auction for this type of paper.
At this same auction, the Treasury sold Government bonds indexed to inflation for 15 years with a marginal interest of 1.304%compared to the previous 1.399%, and Government bonds with a residual maturity of 4 years and 7 months at the marginal rate of 2.382%below the 2.698% of the previous auction.
Outstanding debt
The marginal interest on government bonds with a remaining life of 16 years and 10 months is 3.359%much higher than the 0.826% recorded during the previous issuance, which took place in September 2020, just before, precisely, the ECB began to raise interest rates.
Despite the lower yields offered, the reduction in the cost of new issues was not passed on to the overall debt. In fact, the average interest rate on outstanding debt increased slightly in September, for 2.214%. It remains thus, at the heights of 2018.
Why doesn’t cost reduction affect the entire debt? It takes time.
“The fall in interest rates at issuance is gradually reflected across the entire portfolio, in the same way as it happened when they rose so quickly. The long repayment terms mean that Only about 13% of the portfolio is refinanced each year“, they explain to the Ministry of the Economy, to which the Treasury depends.
Debt to GDP
The moderation of financing costs for Spain comes at a time when The debt of Public Administrations amounts to 105.3% of Gross Domestic Product (GDP).
It should be remembered that Spain has maintained a high level of public debt since the 2008 financial crisis, and that it has been further increased by the Covid-19 pandemic and the extraordinary economic recovery measures. In 2020, the debt exceeded 120% of GDP, and since then the government has worked to gradually reduce this figure.
For his part, The public deficit closed July at 2.34% of GDPabove the 2.27% recorded in the same period a year earlier. The objective imposed by Brussels for this year is 3%.
Spain must comply if it does not want to fall in the sanction procedure for excessive deficit. For the moment, the European Commission has exempted Spain from this sanction, although in 2023 it will exceed this threshold, which amounts to 3.6%.
