Compared to government bonds, equities look cheap

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By Cormac Lucey

One financial market, which has been hugely affected by QE, is the market for eurozone government bonds, or debt securities. They have been driven up significantly in price by the ECB’s programme of creating fresh money and using it to buy government bonds, thereby elevating their prices compared with what they would otherwise have been.

Last week Spain announced plans to sell new government bonds with four maturities, or repayment dates: a 2021 bond at a 0.05% interest rate; 2022 at 0.45%; 2027 at 1.45%; and 2066 at 3.45%. Those first three rates aren’t far above those paid by France, a state with far more solid financial conditions. And while France has its own secessionist pressures, ranging from Corsica to Brittany, they are nowhere near as urgent as those now confronting Spain in Catalonia.

Sensible investors should decline the offer of Spanish government debt that yields considerably less than 2% and consider instead the Stoxx Europe 600 Index, featuring Europe’s 600 largest corporations. It offers a relatively princely dividend yield of 3.8%, well above what the Spaniards are offering.

Published in The Sunday Times (Ireland edition)

November 19th 2017