August 2024 is about to end. On the stock markets, the month was marked by a violent V-shaped movement: block falls, from the first week, of stocks, from which the major markets have already recovered. As for fixed income securities, this month will mark a before and after, from which Investors will find it harder to achieve a ‘safe’ 3% return.
The last monthly auction of 12-month Treasury bills, held on August 6, closed at an interest rate below 3% (the average interest rate remained at 2.954%). This -that the Treasury pays this section with less than 3%- has not happened since February 2023. The auctions (one per month) have closed above this level for 17 consecutive months. The 3.86% that the State paid in October last year, the highest interest rate since the crisis suffered by the peripheral European debt in 2012, now seems very distant.
Now, with yields falling, it remains to be seen what will happen in future issuances; the next 12-month debt will be on Tuesday, September 3. What is predictable is that this yield will continue to fall; It must be assumed that renewing them to equal or better performance has become an impossible mission. In fact, since last June, investors who renewed their Letters did so at lower interest rates.
In the secondary market – where securities are traded after their issue at auction and to which individuals also have access -, The 12-month government debt currently offers a rate of 2.95%It lost 3% at the beginning of August and only recovered it occasionally.
This behavior is a consequence of the ongoing change in monetary policies. In Europe, the ECB already made its first rate cut in 8 years in June; in the United States, the first reduction is considered a given in September. According to David Ardura, investment director of Finaccess Value, this scenario forces the conservative investor to make decisions. “One option is to do nothing, stay in bills or 12-month money market funds and accept that rates will get lower and lower.”. The market is now anticipating a 150 basis point drop by July 2025, which will obviously translate into lower profitability of invoices,” he points out. Another option for struggle For these 3%, this would involve “changing the investor profile a little and assuming a certain volatility”. in exchange of these 3%, towards other assets and longer terms, which the conservative investor is not always comfortable with,” he warns.
“One of the alternatives we have found is to build a portfolio until maturity, either through a fund or through a bond portfolio… If you look, for example, at 3-year corporate bonds in Europe, with a portfolio of triple-B “You can get a yield of over 3% with investment grade corporate bonds. I go to a maturity fund that gives me that yield and for 3 years I don’t touch my money,” Ardura says.
“If I had to renew a Treasury bond, I would consider switching from bonds to 3-year bonds. Because it seems to me that what interests investors now is ensuring high interest rates in the face of the new cycle of declines,” sums up Víctor Alvargonzález, founding partner of the independent consultancy Nextep Finance. To do this, “the easiest way is through government bonds, which can be purchased, like Letras, directly from the Bank of Spain, or online, with very reasonable commissions,” he emphasizes.
Specifically, “I would opt for 3-year bonds, which are, let’s say, the next maturity, in addition to being totally liquid.” Alvargonzález emphasizes that in addition to profitability, it is important the added value that this asset can generate. “There is no type of coupling when you buy a 3-year bond, because you can resell it, and probably more expensively if interest rates fall,” he points out (in fixed income securities, profitability and price behave inversely). The yield on the 3-year Spanish bond is currently 2.56%. With this asset “you ensure this profitability, but you could also generate additional capital gains within a year, if rates fall, so that 2.56% could be easily converted into 4%,” estimates the founder of Nextep Finance.
10-year bond set to lose 3%
The bills have already done so, but the main Spanish reference, the 10-year bond, has also flirted with a 3% drop, and even lost it during the session of August 22 (not at closing). The performance of paper The Spanish over a decade currently stands at 3.09%, but it fell a few days ago to 3.002%. If that were the case, it would be the first time it has fallen below the 3% mark since January 1.
In August, and with the surge of this decline in 12-month yields in secondary, we saw how the bond curves normalized: that is, 10-year debt finally began to offer a higher yield than 12-year-month issues. For most of 2024, the opposite happened: investors obtained more yield by lending their money to the Kingdom of Spain for a single year than for an entire decade.
In a context of diminishing returns, the British neobank Revolut launched this month an offensive to capture savings in Spain with a current deposit account that gives up to 3.56% APR. MyInvestor, Andbank’s neobank, has also just renewed its 3-month deposit at 3.5% APR, subject to contracting an automated portfolio (robo-advisor).
