- Traders pricing in heightened risk before December vote
- Spanish 10-year yield below Italy's as recently as July
In Spain’s government-debt market, the nation’s elections in December are dominating investor sentiment and outweighing the impact of the European Central Bank’s bond-buying program.
Spanish securities underperformed their regional peers on Monday, pushing the yield premium 10-year bonds have over Italy’s to the most in two years. The elections come as the Catalonia region bids for independence while anti-austerity parties may force traditional parties into coalitions. The uncertainty of the election result is being priced into bond markets, according to Amundi, a European money manager with more than 954 billion euros ($1.1 trillion.)
Even signals from ECB President Mario Draghi last week that asset purchases could be extended if Europe’s economic and inflation outlook continues to deteriorate haven’t stopped Spanish bonds diverging from Italy’s.
“These moves have some more to run in the coming months, as elections approach,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The main opposition parties are campaigning for a reversal of the earlier reforms. Forming a government will be very hard.”
Spanish 10-year bond yields rose seven basis points, or 0.07 percentage point, to 2.14 percent as of 4:27 p.m. London time. The 2.15 percent security due in October 2025 fell 0.62, or 6.20 euros per 1,000-euro face amount, to 100.055. Similar-maturity Italian yields rose two basis points to 1.9 percent, widening the spread to 25 basis points, the highest premium since August 2013 on a closing-price basis. Spanish yields were below Italy’s as recently as mid-July.
The yield gap may widen to 50 basis points if campaigning gets more heated and the polls get closer, Nordea’s von Gerich said.
“The ECB cannot do anything about political risks,” he said. “The ‘buy periphery’ idea has clearly lost shine, and will continue to do so in the coming months on the back of increasing political uncertainty as elections are ahead also in Greece and Portugal.”
Last week, Draghi revamped the ECB’s quantitative-easing program, raising the purchase limit to 33 percent per issue of a country’s debt stock, up from 25 percent previously. Citing downside risks to the region’s inflation and growth outlook, Draghi signaled that the central bank could increase stimulus.
Asset purchases slowed in August as liquidity dried up during Europe’s summer holiday period. Holdings of government and agency debt, covered bonds and asset-backed securities rose by 51.6 billion euros ($57.6 billion) last month, the ECB said on Monday. The increase compares with 61 billion euros in July.
A new poll in Spain showed Catalan candidates supporting independence from the rest of Spain are on course for a majority in the region’s parliament before a Catalan election on Sept. 27. Concern about a political standoff between the central and regional government prompted business leaders to write an open letter detailing what they see as the risks of secession, including being left out the euro and not being able to access financing from the ECB.
While Spanish bonds are cheap compared to Italy’s, JPMorgan Chase & Co. strategists recommend closing a long five-year Spain-versus-Italy position. The debt may underperform into the elections, the analysts, including London-based Gianluca Salford, wrote in a note dated Sept. 4. A long position is a bet an asset will appreciate. Morgan Stanley fixed-income strategists including Anthony O’Brien recommended buying 10-year Italian bonds versus five- and 30-year Spanish debt.
Spanish bonds have lost 0.6 percent this year through Sept. 4, according to Bloomberg World Bond Indexes. That compares with a 2.1 percent return for Italian securities and a 0.6 percent euro-area average. Last year, Spanish sovereign-debt returned almost 17 percent.
David Ric, London-based head of absolute-return fixed-income strategies at Amundi, said last week that while he still liked periphery assets, the spreads are not as “fantastically attractive” as they were a year ago.
“For the time being I like the peripheral story but not with the same amount of risk we applied a year ago,” Ric said in an interview at Bloomberg’s London office on Sept. 2. “Spain is going to get into the headlines with the upcoming elections, that trade is pretty much in the market, people are already positioned for it.”