Since the end of January, bond prices have started to fall with a consequent rebound in yields. It is not something that occurs in all debt instruments, but rather it occurs in bonds with longer durations starting at three years. Some analysts point out that the main reason for this is the fear that the recovery will arrive but the monetary stimulus will continue, which could fuel inflation.
The improvement of the economic outlook by the start of the coronavirus vaccination processes has increased investors’ appetite for risk and it has caused many portfolios to divest themselves of sovereign bonds in search of higher yields. This lower demand causes the prices of bonds to fall – despite purchases by central banks – and their profitability – the interest demanded by investors to buy them – rises, since these two variables move in the opposite direction.
In parallel, the foreseeable rise in inflation – due to the economic recovery, the stimulus plans and low interest rates – leads investors to demand a higher interest rate to buy public debt.
“The rebound in bond yields is a breath of fresh air for the main source of income in the sector, which is the interest margin. While the defensive sectors (‘utilities’, food, health, …) lose attractiveness for investors in an environment of acceleration of the economic cycle and a rebound in bond yields. Many of the revenues of these companies are regulated or have a low correlation with the pace of economic activity. In addition, many of these securities distribute a large part of their profits in dividends, reinforcing their ‘bond approach’ character ”, comments Bankinter analyst Rafael Alonso.
The bank, a support for the Ibex 35
In this situation, not all stocks behave the same. An increase in the yield of the bonds means that the securities of the banks begin to gain better momentum, while electricity companies such as Endesa, Iberdrola or Naturgy can correct on the stock market. The same is true for highly valued stocks such as the tech sector.
“The valuations of these companies are based on the discount of future cash flows that are expected to be very high, a discount for which interest rates are usually used without long-term risk, so a rebound in these has a significant downward impact on the valuation of these companies”, Points out Juan José Fernández-Figares, Link Securities analysis director.
On a technical level, in the current situation of the rebound in bonds, European banks are gaining appeal at this time. The Spanish bank weighs 23% on the Ibex 35, which is great support for the selective does not correct and continues to trade above 8,000 points in the short term.
“In recent sessions, Banco Santander has been able to overcome the resistance of the last three months, while the Ibex 35 remains below it, located at 8,460 points. In recent years, Santander has been leading the big movements with respect to its index ”, assesses Eduardo Faus, technical analyst for Renta 4.
In the same direction, Mónica Triana, trading analyst for Investment Strategies, expresses herself. “There are really interesting values and sectors in Europe and in the case of Spain, important values to follow would be Santander and BBVA,” he underlines.
“Of the eight great values of the Ibex 35, the banking sector may react to the upside. I think it is quite probable and Telefónica may as well. Electrical and Cellnex are bad. Inditex may react to the upside, but it is not very firm. We are awaiting what the banking system does and that is what the Ibex 35 is going to affect, ”adds independent analyst Antonio Espín.