The current crisis in Spain will result in Spanish bank bondholders taking severe haircuts, after a similar scenario in Ireland last year, Henderson Global Investors says.
Yesterday, yields on benchmark 10-year Spanish bonds once again moved into dangerous and unsustainable territory above 7%.
More worryingly, the country's 2-year bonds saw yields jump by 50bps in a single day, to 5.5%. Yields on the shorter-term debt have more than doubled from the 2.5% mark seen in March.
The yield curve in Spain has flattened as a result, with the 10-year bond climbing more slowly from its March level of 5.18% to its current level of 7.19%.
Henderson bond fund manager John Pattullo said the flattening of the curve in the last few months was a sign of stress in credit markets, and he expected junior bondholders will have to take a hit to help the country achieve a more sustainable funding position.
"The biggest problem now is for subordinated existing bondholders," the manager of Henderson's £1bn Strategic Bond fund said.
"We think junior bondholders across many banks will get equitized."
The problem for Spain is many of the junior bondholders are retail investors who bought preference shares from the major banks.
Such a move - reminiscent of action taken in Ireland whose economic situation at the start of the financial crisis was similar to Spain's now - would cause political problems in Spain.
However, Pattullo said the government could not afford to take the hit on its own balance sheet given its current debt position, meaning millions of savers in Spain are at risk.
"Europe hasn't taken the pain yet and it has to happen, so we think in Spain it happens this year," he said.
"It has to fall on bondholders, and we think they either get equitized or forced into a mandatory exchange."
Bondholders at Irish banks took haircuts of up to 90% on their capital when the country's situation hit breaking point.
UK bank bondholders have also been caught up in the storm, with Bradford & Bingley investors wiped out after the building society was nationalised.
Pattullo said the move would help Spain meet funding requirements, with cash raised by an equitization of debt holders going into the pot alongside the €100bn bailout announced over the weekend.
Square Mile’s series of informal interviews
'An entirely different beast': How have emerging markets, Asia and Japanese equities evolved over the past decade?
Talking Strategies: In the video below, Jupiter's fund managers discuss how changing tides over the past two decades have resulted in emerging markets, including EMD, and Asia and Japanese equities to become a core part of many wealth manager portfolios....
Spent 20 years with Aviva
Latest news and analysis