Goldman Sees End to Narrowing Spreads in Europe Periphery
As a rally in the euro-area’s higher-yielding government bonds shows signs of cooling, Goldman Sachs Group Inc. joined investors saying the narrowing of yield spreads to German bunds is over.
Italian and Spanish 10-year government debt declined today, pushing yields on Italy’s securities up from near the record-low 2.626 percent set on July 30. Portuguese and Greek bonds also fell as a report showed euro-area services expanded less than initially estimated, underlining a sluggish recovery that may prompt investor concern the securities have climbed too far.
“We do not expect any further compression of spreads,” Goldman Sachs strategists Silvia Ardagna and Francesco Garzarelli wrote in an e-mailed note today in London. “We are more concerned about Italy where, over the past few months, economic activity data has continued to surprise on the downside and institutional and structural reforms have not yet been delivered.”
Italy’s 10-year yield jumped six basis points, or 0.06 percentage point, to 2.76 percent at 4:22 p.m. London time. The 3.75 percent bond due in September 2024 declined 0.55, or 5.50 euros per 1,000-euro ($1,337) face amount, to 108.86.
Rates on Spanish debt with a similar due date climbed six basis points to 2.56 percent, the biggest increase since July 10, while those on German bunds were four basis points higher at 1.17 percent.
The extra yield on Italy’s 10-year bonds over equivalent-maturity German bunds increased three basis points to 158 basis points today, after rising last week for the first time since the five days through July 11, amid concern that woes at Portuguese lender Banco Espirito Santo SA would dent sentiment in the region.
Italy’s yield premium over Germany has dropped from as much as 575 basis points in November 2011 and 220 basis points on Dec. 31. The Spanish spread was at 138 basis points today, from 143 basis points at the end of last week.
“At current spread levels we think there is not enough of a buffer for investors to take credit risk in intermediate and long-dated peripheral sovereign bonds and to position for further spread tightening,” Goldman’s Ardagna and Garzarelli wrote.
Demand for the euro region’s higher-yielding assets stalled last month as woes in Portugal’s banking system briefly challenged investor appetite for securities that they had shunned at the height of the sovereign debt crisis. The debt has been supported by European Central Bank President Mario Draghi’s July 2012 vow to safeguard the euro and policy easing this year aimed at fueling inflation, which has slowed to less than half the central bank’s target.
Standard Life Investments Ltd., Scotland’s second-biggest money manager, said last week that the securities in Europe’s periphery may be starting to look expensive even as it wasn’t ready to head for the exit.
Italian and Spanish 10-year yields have more than halved since Goldman Sachs recommended buying peripheral government bonds in mid-2012. Strategists at the New York-based bank predicted in May that both nation’s yield premium over bunds would narrow around to 150 basis points.
Markit Economics said its purchasing managers’ index of services rose to 54.2 last month from 52.8 in June, below the 54.4 reading published on July 24. The Italian July services gauge declined to 52.8 from 53.9 a month earlier. A separate report showed euro-area retail sales increased 0.4 percent in June, less than the 0.5 percent prediction of economists in a Bloomberg survey.
Portugal’s 10-year yield rose seven basis points to 3.70 percent. The securities yielded 252 basis points more than German bunds, from as little as 184 basis points on June 10.
Greek 10-year bonds tumbled, pushing the 10-year rate 27 basis points higher to 6.45 percent and touched 6.47 percent, the highest since May 26. Reuters reported yesterday that European officials are considering disbanding a group that has been overseeing Greek economic reforms, citing people it didn’t identify.
Italian securities earned 10 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent and Germany’s gained 5.7 percent.
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