Spain’s Bulletproof Bonds Resist Ukraine StrainsEshe Nelson
Not even the threat of conflict in Ukraine can derail the recovery in the bonds of Europe’s most-indebted nations and the euro’s advance.
Yields from Greece to Ireland sank to the lowest since at least 2010 this week as the recovery from the sovereign-debt crisis gained momentum. The bonds withstood rising tension between Russia and Ukraine that triggered a selloff in emerging markets, and are set for weekly gains even after the European Central Bank refrained from adding stimulus yesterday. The extra yield on 10-year Portuguese bonds relative to German bunds fell to the lowest in 3 1/2 years today.
“Peripheries are in a much better position than the troubled members of the emerging-market world,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “We expect spreads to continue to narrow. In Spain and Italy much of that process has already happened but there is still upside. Portugal and Greece still have considerable upside.”
Boosted by a brightening economic outlook, the average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 2.44 percent on March 5, the lowest in the history of the euro area, according to Bank of America Merrill Lynch indexes. It’s down from more than 9.5 percent in 2011, when the region was rocked by concern nations may struggle to service their debt, risking a breakup of the currency bloc. The ECB raised its forecast for 2014 growth in the euro area yesterday, while Spain drew record-low yields at a sale of three-year notes. The euro touched its strongest level in more than two years today.
Spain’s 10-year yield dropped four basis points, or 0.04 percentage point, to 3.36 percent at 4:46 p.m. London time, extending this week’s decline to 13 basis points, the most since the period ending Jan. 3. It touched 3.35 percent yesterday, the lowest since January 2006, and down from a debt-crisis peak of 7.75 percent in July 2012. The 3.8 percent bond due in April 2024 rose 0.345, or 3.45 euros per 1,000-euro ($1,387) face amount today, to 103.70.
The Spanish 10-year yield spread to bunds narrowed 17 basis points this week to 1.71 percentage points, after reaching 1.69 percentage points, the tightest spread since November 2010. That compares with a one-year average of 2.64 percentage points.
Rabobank is recommending investors buy 10-year Portuguese bonds versus French securities, McGuire said. The bank’s Spanish clients are betting the Spain-Germany spread will narrow to 1.5 percentage points, he said.
Emerging-market currencies tumbled on March 3 after Russian President Vladimir Putin won an endorsement from lawmakers to deploy troops in Ukraine, ratcheting up tension in the Crimea region. While German bonds, which are seen as a haven in times of economic and geopolitical stress, advanced and sent 10-year yields down by the most since September, Italian bonds also climbed. The securities now have a positive 120-day correlation, versus a negative correlation this time last year, according to data compiled by Bloomberg.
The extra yield investors demand to hold Italy’s 10-year debt over similar-maturity German bonds fell eight basis points this week to 1.77 percentage points, and touched 1.74 percentage points yesterday, the least since June 2011. The spread has continued to narrow after a political feud saw the ouster of Enrico Letta as prime minister by his main antagonist Matteo Renzi. Moody’s Investors Service raised the outlook on Italy’s Baa2 credit rating to stable from negative on Feb. 14, citing the government’s financial strength.
“Peripheral markets have been very strong,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “As the ratings situation normalizes, as the economic situation normalizes in the euro zone and the stigma of peripheral bonds continues to decrease, you’re seeing more and more investors return to these markets.”
Portuguese and Greek 10-year rates have dropped more than 1 percentage point since the start of the year. Portugal is moving toward exiting its international rescue program. Ireland’s credit rating was restored to investment grade by Moody’s after that country exited its three-year bailout.
Portugal held two sales of debt via banks this year, and is preparing to resume regular auctions of bonds, according to debt-office chief Joao Moreira Rato.
“The top ten investors coming to the syndications are taking down a lot more bonds than before so they are more comfortable to increase the exposure,” Rato said in an interview in London on March 5. Investors, including “some from Scandinavia, Benelux and more of the global asset managers located between London and New York” are interested in the securities, he said.
Portuguese 10-year yield spread over German bunds dropped as much as 14 basis points today to 2.90 percentage points, the lowest level since Aug. 20, 2010. The spread has narrowed from more than 4 percentage points at the end of last year.
Portugal and Slovenia are among BlackRock Inc.’s highest-conviction views and the company expects a further decline in their respective yield spreads over bunds, Scott Thiel, the London-based head of the global bond team, said by e-mail yesterday.
Euro-area services growth accelerated in February, data on March 5 showed. A purchasing managers index rose to a 32-month high of 52.6, exceeding the provisional reading of 51.7, Markit Economics said. A separate report the same day showed exports increased 1.2 percent in the fourth quarter, helping gross domestic product increase 0.3 percent.
While inflation has been below the ECB’s ceiling of just below 2 percent for 13 months, it rose to an annualized 0.8 percent in February from 0.7 percent the previous month, according to a Feb. 28 report.
The euro extended a fifth weekly gain today, after jumping yesterday, when ECB officials kept interest rates unchanged and President Mario Draghi said the recovery would proceed, albeit at a “slow pace.” The central bank estimated the region’s economy will grow 1.2 percent this year, from a previous forecast of 1.1 percent, and 1.5 percent in 2015.
The euro rose to $1.3915, the strongest level since October 2011, before paring its advance to $1.3864 after data showed U.S. employers added 175,000 workers in February, following a 129,000 increase the previous month. That’s more than the median estimate in a Bloomberg News survey of economists for a 149,000 gain. The currency is 0.5 percent stronger this week.
German 10-year yields were little changed at 1.65 percent after rising to 1.68 percent, the highest since Feb. 25, after the payrolls data.
The Spanish Treasury paid the least since 2006 to borrow for 10 years at an auction yesterday, selling 1.1 billion euros of bonds maturing in April 2024 at an average yield of 3.34 percent. The nation sold three-year securities at a record-low rate of 1.309 percent.
Greek 10-year yields touched 6.62 percent yesterday, the lowest since May 2010. Ireland’s reached 3.04 percent on March 5, the least since 2005.
“We’ve had significant improvement in the underlying economics” in the euro area, said Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London. “Spain has done a huge reform program and the economy is stabilizing. That’s been recognized by investors. Overall, there’s still an underinvestment in periphery markets.”