While U.S. Flaps About 3% Bonds, Spain Rakes in the Euros
U.S. bond investors are getting in a real twist this week, fretting over huge supply and the potential for 10-year yields to reach 3 percent. And there goes Spain, sailing by with a new 30 year bond.
The almost inorderly queue of demand shows that in European bond markets, the recent global market turmoil is a distant memory.
The offering is flying out the door, propelled by an "early bird special" on Monday that promised bigger allocations to orders submitted before syndicate banks released any price guidance. A yield that may wind up around 2.75 percent is plenty of incentive, and it helps that Spain has the market pretty much to itself this week.
The order book was already more than 14 billion euros ($17.3 billion) by the time initial price guidance was set at 109 basis points more than mid-swaps. As it grew above 25 billion euros on Tuesday, pricing tightened to 105 basis points more than mid-swaps. With this level of demand, Spain should be able to print a deal size close to the barnstormer it brought in January, when it issued 10 billion euros of 10-year debt.
As Gadfly has argued, Europe's bond market is on a different planet from the U.S. market, since the European Central Bank plans to keep buying debt for at least most of the rest of this year. The prospect of the taps getting shut off soon is a strong draw for sovereigns to issue while they can. By the end of Tuesday Spain could well have completed about a third of its total bond issuance requirements for the year, a nice place to be in with the first quarter barely half finished.
Spain is no longer a peripheral credit, and it makes sense for investors to reward it with yields much closer to those of the core countries of Europe. Its economic recovery is one of the strongest in the region. And while the Catalonia independence issue hasn't gone away, it no longer commands an additional risk premium. And it is a big positive that the country's debt is eligible for a wider range of bond indexes after Fitch Ratings raised Spain to A minus on Jan. 19. S&P Global Ratings also has its BBB+ rating on positive outlook.
U.S. bond traders can be excused for thinking that the Atlantic just got a little bit wider.
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