The latest decision of the European Central Bank of 2024 met market expectations. However, the year’s latest interest rate cut for the euro benchmark strained the yield on the oldest sovereign bonds issued in the eurozone. Spanish debt with a maturity of 50 years experienced a rebound in its return that sank the prices of these securities. Now, the profits for the investor in the year are cut from 11% to 3.6% after the Federal Reserve’s announcement that there would only be two more rate cuts in the US in 2025. And all of this is happening so far in December.
This is bad news for the investor who seeks profits in the year with the difference in the price of debt securities. On the contrary, it is better news for those who are here to recover their investment at the maturity of these securities, known as methuselah for its longevitywithin several decades.
The shortest-term European sovereign debt has recorded a drop in profitability of 100 basis points so far this year (110 points in the case of the Spanish twelve-month bond) with the ECB’s 100 basis point cut in 2024 at its deposit facility rate. Longer duration bonds did not react in the same way, following the theory that the profitability of these bonds should not drop as much because the risk with a longer and indeterminate time horizon is greater. However, in the final stretch of the year the curve moved almost in the same direction for both three month letters as for bonuses with a maturity of more than a decade.
It was after the last meeting of the ECB when the profitability of sovereign debt with longer duration abruptly recalibrated its profitability. The political situation in Germany and France made the market believe that the European Central Bank could accelerate its monetary easing. It was discounted a 50 basis point adjustment in January. Finally, there was no trace of these intentions in Christine Lagarde’s last speech, while the institution cut growth by two tenths planned for 2025 (they now foresee a GDP increase of 1.1%) for the entire euro zone.
The increase in investors’ risk aversion raised the yield on Spanish 50-year bonds last week. 3.3% seen on December 6 at 3.53% current. Thus, anyone who bought these securities in January today would have cut their profits by less than half, up to 3.6%. Even so, 2024 would be benign for these titles for the second consecutive year. Taking, for example, the Spanish bond issued in February 2021 that matures in 2071, with a price of 52.6 points (nominal value) currently, 2024 would have lower profits than 2023, of 9.8%, but not It would compensate for the collapse in 2022 of more than 40%.
In the case of the 30-year Spanish debt, the same thing happens. He price change cuts investor profits more conservative from 12% to 8.5%. In this way, the yield to maturity of these debt securities in the secondary market is 3.6%. The German one for the same period stands at 2.5% while the Italian one, the one that has risen the most so far this month, stands at over 4.11%.
Duration, but controlled
As the sovereign debt curve normalizes in European economies, analysis firms, managers and investment banks are beginning to talk about extending duration in fixed income. However, mentions of titles older than ten years are an exception. That is to say, They advise leaving the shortest term progressivelybut not to turn to Methuselah bonds, generally more designed for institutional investors.
“While volatility is a challenge for traditional fixed income investments, rising yields also offer potentially attractive entry points, especially in the range from three to seven yearssince exposure to both very long and very short positions continues to be unnecessary”, states Julius Baer in his strategic report for 2025. In the same line, they are positioned in PIMCO to escape the possible swings in the longest sections with the monetary easing that is discounted for next year. “We prefer short and intermediate maturities, where investors can find attractive returns without assuming greater interest rate risk.”
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