Why Is Spain Getting a Better Deal on the Bond Market Than the U.S.?
Policy + Politics

Why Is Spain Getting a Better Deal on the Bond Market Than the U.S.?

The Washington Post’s Wonkblog had an interesting piece the other day on the fact that Spain – or as the headline put it, “Spain!” – is now able to borrow money from investors for six months at negative interest rates. That means that Spain has joined the relatively elite club of nations whom investors will pay to hold their money. 

Earlier in the week, the Spanish government sold three quarters of a billion dollars in six-month securities at a rate of -0.002 percent. The offering sold out

Sounds like a great arrangement. The Spanish government actually borrows money from investors, pays back less than the total principle six months later, and the lenders are somehow satisfied that they got a good deal. 

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That raises the question: How come the U.S. Treasury Department is still paying interest on relatively short-term debt? U.S. Treasury securities are, traditionally, the closest thing to a risk-free asset that investors can find. Yet when it comes to yield, the U.S. pays (an admittedly tiny) 0.02 percent on its six-month securities, while Spain’s rate is negative. 

Look at the yields on longer-term debt, though, and the difference is significant. On Thursday, the rate on a 10-year U.S. Treasury note was 1.97 percent, while Spain was able to borrow over the same 10-year window at only 1.22 percent

It’s tempting to ascribe the change to the European Central Bank’s relatively recent conversion to the belief that easy money policies will aid in the region’s economic recovery. But considering the fact that the Federal Reserve already has U.S. rates near zero, that can’t be the whole story. So, what gives? Is somebody at the Treasury Department falling down on the job? 

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Not exactly, says economist Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. 

To begin, he admits, the entire concept of negative interest rates is a bit odd for most economists. “I used to give talks where I would talk about the ‘zero lower bound’ on interest rates,” said Bernstein, who formerly served as chief economist to Vice President Joe Biden. “Then, in the last few months, I find people will raise their hand and say, ‘There is no zero lower bound.’” 

However, he said, the way rates are being set today falls under “fairly established market mechanisms that seem pretty coherent to me.” 

Investors aren’t just factoring in the likelihood of getting paid back, but also their actual return once inflation is taken into account. “What matters to investors is the real rate of return,” Bernstein said. “But even with low inflation investors are already paying us to hold on to their money in real terms.” 

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Just how these rates get set is also worth remembering. “The thing to understand there is that these yields are set at auction; these are market-set rates,” Bernstein said. “The government offers, investors bid and the yields are set.” The main reason investors placing their money in Spain are willing to settle for a negative return is that they don’t anticipate significant future growth in the Spanish economy, and don’t need to be compensated for the inflation that would accompany it. 

That’s different in the U.S., Bernstein said. “Investors here could certainly argue that they need a premium against future inflation rates. That would be different in economies that are doing less well.” 

Countries like, for instance, Spain. 

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