If the financial system were to avoid a Sovereign debt yield shock, Central Banks and Institutional debt fund managers would have much more attentive in the issuances of Sovereign debt financing in terms of pricing, yields and duration. The frontloading in short duration issuances made by the United States Federal Government during 2020, highlighted the necessity of excessive Fiscal Deficit financing in the near term without realizing any Federal Tax Revenues. The steep increases in the U.S. Treasuries front-end yields have been of consistent volatility, reflecting the lack of yield curve stability in the USDollar money market coupled with short term funding and liquidity concerns, this will thereby be one of the factors determining the Treasuries Yield curve inversion.
The U.S. 10y Treasury Yield and the 10y BTP yield have been correlated in their drift upward that will see both the Sovereign debt securities being priced within a Yield range of 3.15%<3.68%, in order to discount persistent inflationary pressures in the economy, while also Central Banks would try to stabilise monetary policy for a high inflationary economic environment with many unknowns going forward.
In this environment of Sovereign debt yields correlating to economic growth and macro-economic factors, the yield spread differential between the 10y Treasury yield and the Spanish 10y Bonos yield, of 94 basis points seems highly out of place and a clear Sovereign debt market mispricing. The Spanish economy has no match for the U.S. economy, and insofar the spread differential does not reflect at all, the material economic factors and economy sizes. The 10y Bonos Yield 1.96% still lower than the 10y U.S. Treasury yield 2.90% for a 94 basis point spread differential. This represents evidently a bond market mispricing, due to ECB indiscriminate yield curve compression, that could then result in an arbitrage opportunity, if not, clear Sovereign debt security price action correction that will have to see the 10y Bonos Yield clearly reflecting the real strength of the Spanish economy, compared to the U.S. and frankly to the Italian economy.
In our opinion, the Spanish Yield curve it’s completely flowed making Bonos debt largely mispriced. The 10y BONOS YIELD, if priced correctly at the market, should be much higher than the U.S. Treasury and even of the 10y Italian BTP yield.
Thereby, won’t be a surprise out of the blue to see a consistent SELL-OFF in Spanish sovereign debt that would reflect the debt market risk and the Spanish economy output potential and strength as in fact only Spain Debt/GDP ratio = 118.4% in 2021, there’s no way the Spanish Sovereign Debt yield curve can be as low and mispriced.