Spain’s Bumper January Bond Sales Widen Funding Gap to Italy: Euro Credit
Spain's Prime Minister Mariano Rajoy
Denis Doyle/Bloomberg
Mariano Rajoy, Spain's prime minister.
Mariano Rajoy, Spain's prime minister. Photographer: Denis Doyle/Bloomberg
Spain’s Bumper January Widens Fund Gap With Italy
Denis Doyle/Bloomberg
Investors made 7 percent on Spanish debt last year as the nation’s 10-year bonds rose, pushing yields down 37 basis points to 5.09 percent.
Investors made 7 percent on Spanish debt last year as the nation’s 10-year bonds rose, pushing yields down 37 basis points to 5.09 percent. Photographer: Denis Doyle/Bloomberg
Spain’s bonds are poised to outperform Italy’s for a second year after the nation’s debt agency in Madrid raised more than a quarter of the funds it needs this year in the past six weeks.
Spain has issued 25.4 billion euros ($34 billion) of debt so far this year, according to UBS AG estimates. Italy has sold 8 percent of its requirement while France has issued 16 percent and Germany 12 percent, the calculations show. All four nations will sell securities this week amid concern that a plan to help Greece avoid default is unraveling and may spark a fresh wave of contagion in the euro-region.
“Spain’s funding this year has been massive,” said Gianluca Ziglio, an interest-rate strategist at UBS AG in London. “That is a huge amount and they’ve done it in one and a half months. The picture for Italy is the opposite and it doesn’t bode well because demand is weak.”
Investors made 7 percent on Spanish debt last year as the nation’s 10-year bonds rose, pushing yields down 37 basis points to 5.09 percent. Italy’s fell, with benchmark 10-year bond rates climbing 229 basis points, or 2.29 percentage points, to 7.11 percent. Holders of Italian debt lost 5.7 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. The rates were 5.21 percent and 5.53 percent, respectively, at 3:27 p.m. London time. Yields on both nations’ 10-year securities climbed to euro-era records last year as contagion from the debt crisis spread.
Bond Rally
Spanish and Italian bonds have rallied since Dec. 8, when the European Central Bank said it would give three-year loans to banks to boost lending, a measure Spanish Prime Minister Mariano Rajoy says is helping the bond market.
Spain’s accelerated issuance has come at a cost: its 10- year bond yield rose 32 basis points last week, while Italy’s fell nine basis points. The yield difference between the two securities has narrowed to 32 basis points, from a high of 202 basis points on Dec. 30.
“It’s a question of whether you want pain up front or pain later,” said Ciaran O’Hagan, the Paris-based head of euro-area rate strategy at Societe Generale SA. “It’s longer-term positive for Spain. Italy will have to make up for lost time.”
Spain has raised more than Italy this year by being “opportunistic” about when and how it accesses the market, according to David Schnautz, a fixed-income strategist at Commerzbank AG in London.
Benchmark Sale
The nation sold an additional 4 billion euros of benchmark 10-year bonds through banks last week. Italy last sold securities through banks in June.
Spain is set to sell 12- and 18-month Treasury bills tomorrow and as much as 4.5 billion euros of securities on Feb. 16, according to Commerzbank AG. Italy plans to auction bonds tomorrow after a sale of 12 billion euros of bills today.
“Spain has been prudent by selling bonds when and where it sees demand; they want to be as flexible as possible in order to get the debt away,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Italy has bigger funding requirements and a strong domestic investor base, which may prefer supply to be smooth throughout the year.”
Italy has 175 billion euros of debt to issue this year, according to UBS. The nation’s debt agency usually sticks to a monthly auction plan, which spreads issuance over the calendar year, according to Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.
Fundamentals ‘Poor’
“Italy has so much debt to issue,” said Peter Allwright, head of absolute rates and currency at RWC Partners Ltd., a London-based asset-management company that oversees about $4 billion. “It’s difficult to be long Italian debt because the underlying fundamentals are still poor.”
Spain and Italy may face difficulties as the euro-region slips into a recession, Allwright and Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London, said.
The euro-area economy will probably contract 0.5 percent this year with recessions in crisis-hit Greece and Portugal, compared with a 2.3 percent expansion in the U.S., according to Bloomberg surveys of economists. Spain’s economy will contract 0.1 percent, while Italy’s will decline 1.2 percent, the surveys show.
“We see ominous dark clouds looming in the second half of the year as austerity bites,” Allwright said. “That raises the question of where economic growth will come from in Europe.”
The Spanish government said Dec. 30 that its 2011 deficit would reach 8 percent of gross domestic product, exceeding the European Commission’s 6.6 percent forecast, after growth stalled. While Italy’s deficit probably shrank last year to 4 percent from 4.6 percent a year earlier, according to the EC’s projections, its debt load, estimated at 120.5 percent of GDP last year, is almost double the 69.6 percent forecast for Spain.
“Spain’s done a really good job in front-loading its sales,” said Lloyds’s Wand. “Italy has a lot of work to do, it still has a wall of supply it needs to sell.”
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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