Spanish Bond Spread Narrows as ECB QE Boost Outshines Ratings

  • Ten-year yield gap to Germany shrinks first time in 3 weeks
  • Euro-area bonds hold gains after U.S. labor market report

Spain hasn’t had a government since December and missed its 2015 budget-deficit goal. That didn’t stop its sovereign securities from outperforming benchmark German bonds this week, holding to their gains after Standard & Poor’s affirmed the country’s BBB+ rating.

With the European Central Bank starting to implement a 20 billion-euro ($23 billion) increase to its monthly asset-purchase program, Spanish 10-year securities jumped this week with their Italian counterparts, outpacing gains by Germany’s bunds, which are perceived to be among the safest in the 19-nation currency bloc.

The extra yield, or spread, that investors get for holding Spanish 10-year bonds instead of similar-maturity German debt narrowed for the first week since March 11. The gap shrank four basis points, or 0.04 percentage point, to 130 basis points.

‘QE Squeeze’

“With the expansion of the monthly purchases at the back of one’s mind, it’s difficult to be too negative on the Spanish government-bond market,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “The QE squeeze of periphery spreads is the predominant market factor.”

Spain’s 10-year bond yield was little changed at 1.44 percent as of the 5 p.m. close in London, leaving its drop this week at nine basis points. The price of the 1.95 percent security due in April 2026 was 104.755 percent of face value.

The yield on Italian 10-year bonds was little changed at 1.22 percent. The yield dropped eight basis points this week, narrowing the spread to German bunds to 109 basis points. German 10-year yields fell two basis points Friday to 0.13 percent.

Bonds across the euro region held their weekly gains even after a U.S. Labor Department report showed employment rose in March more than economists predicted and a rebound in wages also beat forecasts.

Earlier, data revealed manufacturing in the euro area expanded more than initially estimated, a day after a report showed consumer prices declined for a second month, confirming that the economic recovery has so far been insufficient to boost prices. That’s encouraging bond bulls to wager on more stimulus from the Frankfurt-based ECB.

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