Italy Fights Spain for Investors as ECB Boost Fades: Euro Credit
Italian and Spanish bonds slumped last week after demand dropped at a Spanish bond sale and Prime Minister Mariano Rajoy said his country is in “extreme difficulty.” The decline reversed a first-quarter rally sparked by more than 1 trillion euros ($1.3 trillion) of ECB loans to the region’s banks via its longer-term refinancing operation. Spain’s 10-year yield spread to German bunds widened to the most in four months, while Italy’s reached a six-week high.
“Spain and Italy are coming back down to earth after an incredible first quarter,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole SA in London. “The LTRO bought some time, but not a massive amount of time. Now the second quarter will be harder than the first unless policy moves convince foreign investors to come back in.”
Italian 10-year bonds fell for a fourth week, with the yield advancing 40 basis points to 5.51 percent. The yield difference over bunds widened to 378 basis points, compared with an average of 381 basis points in the first quarter. Spain’s 10- year yield spread to Germany reached 410 basis points last week after averaging 333 basis points in the first three months.
Yields dropped in the first three months of the year, suggesting Europe’s lenders were recycling ECB cash into regional bonds. Investors made 13 percent, including reinvested interest, on Italy’s bonds in the period between the ECB announcing the loans on Dec. 8 and the end of the first quarter. Spanish debt returned 6 percent.
“The two LTROs are a window of opportunity for governments to undertake fiscal consolidation and structural reforms,” ECB President Mario Draghi said in Frankfurt on April 4. “National policy makers need to fully meet their responsibility.”
Credit Agricole calculates that the ECB’s support, including loans to banks and direct purchases, prompted purchases of more than 250 billion euros of Spanish and Italian government securities between the third quarter of 2011 and the first quarter of this year. That’s more than the 216 billion euros of debt sold by the two nations during the same period.
Spain sold 2.59 billion euros of bonds on April 4, just above the minimum amount it planned for the auction and below the 3.5 billion-euro maximum target. The sale followed auctions on March 27 where both Spain and Italy failed to raise their maximum target amount.
“The positive effect from the LTRO is fading and so the market is focusing on what the political developments will be,” said Werner Fey, a fund manager at Frankfurt Trust Investment GmbH, which oversees 6.5 billion euros of fixed-income assets. “The Spanish auction was not very well received and there’s a risk that forthcoming auctions could be difficult for other peripheral countries.”
Spain has to repay 44.3 billion euros of bonds in the second quarter, according to data compiled by Bloomberg, while Italy has 87.8 billion euros to refinance.
Spain has already met 44 percent of its total financing needs for this year, according to UBS AG estimates. Italy has sold 28 percent of its requirement while France has issued 32 percent and Germany 25 percent, the calculations show. Most of the Spanish and Italian bonds were bought by local investors, the data shows.
Charity at Home
“Foreign investors have been reducing their holdings, there’s been a significant shift toward relying on domestic investors,” said Gianluca Ziglio, an interest-rate strategist at UBS in London. “This trend is likely to stay in place and that leaves the burden on the domestic investors, which aren’t being supported by the ECB’s liquidity anymore.”
Natixis Asset Management is buying Italian debt while remaining neutral on Spain, because Prime Minister Mario Monti’s government has removed much of the political risk surrounding his nation’s securities, while Spain’s situation remains clouded, according to Axel Botte, a Paris-based strategist at the $694 billion fund manager.
Monti, who replaced Silvio Berlusconi in November as Italian bond yields jumped to euro-era records, is implementing spending cuts and tax increases to eliminate the budget deficit next year and trim the nation’s 1.9 trillion-euro debt.
Spain’s Rajoy announced on March 2 that his government wouldn’t comply with the deficit target the previous administration had agreed with the European Union. The nation now wants to get its debt down to 5.3 percent of gross domestic product this year, rather than 4.4 percent. The country hasn’t met the EU’s 3 percent deficit ceiling since 2007, and the government forecasts debt to reach 79.8 percent of GDP this year, the highest in more than three decades.
Banca Ifis SpA, a Venice-based financial-services company controlled by a member of the Furstenberg family, said on April 4 that it bought 2 billion euros of Italian sovereign debt in December and January. BlackRock Inc., the world’s biggest money manager with $3.51 trillion of investments, said on the same day that it is buying Italian stocks.
“We’ve gone back overweight Italy, after having had virtually nothing there for a number of years,” Nigel Bolton, who oversees about $14.6 billion as head of BlackRock’s European equities, said in an interview. “As the direct result of Berlusconi going, we started to put money back into Italy and it’s our second-biggest overweight country in Europe.”
‘Number of Missteps’
The extra yield investors demand to own Spain’s 10-year bonds instead of Italy’s widened to an eight-month high of 44 basis points last month on concern its deficit-cutting efforts are faltering. The gap is currently about 33 basis points.
“Operations like the LTROs can provide ongoing support to sovereigns, but only if they are perceived to be moving in the right direction,” David Mackie, chief European economist at JPMorgan Chase & Co., wrote in a note to investors on April 5. “The Spanish government has made a number of missteps in recent weeks which have raised questions about its credibility, and it is this that is making investors reluctant to purchase Spanish debt.”
To contact the editor responsible for this story: Mark Gilbert at email@example.com