Spain’s Bonds Best Italy by Most in 2 1/2 Years

Spain’s government bonds rose, pushing their yields to the lowest relative to Italy’s in more than 2 1/2 years, as European Central Bank stress tests showed the diverging quality of balance sheets at the region’s lenders.

While Spain’s 10-year securities rose for a fifth day, those from Italy, Portugal and Greece declined after the ECB’s health check, which identified a shortfall of 25 billion euros ($32 billion), the largest part of which came from Italian lenders. German 10-year bunds climbed, pushing yields down from a two-week high, as business confidence in Europe’s largest economy declined for a sixth month in October.

“Spain came out looking better than Italy so we’ve seen an outperformance of Spain,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “If anyone was a loser from the stress tests’ outcome it was Italian banks.”

Spain’s 10-year yield declined three basis points, or 0.03 percentage point, to 2.14 percent at 4:20 p.m. London time. The 2.75 percent bond due in October 2024 rose 0.29, or 2.90 euros per 1,000-euro face amount, to 105.435.

Not since February 2012 have Spanish 10-year yields been so low relative to those in Italy. With Italian bonds declining today, the yield spread widened for a third day, expanding seven basis points to 41 basis points.

After the stress tests, a slide in Italy’s lenders dragged down European stocks, led by Banca Monte dei Paschi di Siena SpA’s 18 percent slump. Only eight banks haven’t already plugged capital gaps or satisfied the ECB with plans to shrink, out of the 25 found with a shortfall. From a 25 billion-euro hole, 6.35 billion euros remains, and half of that is in Italy. No French, German or Spanish bank was sent away with money still to raise.

Economic Woes

Italy’s 10-year rate increased four basis points to 2.55 percent. Portugal’s climbed 13 basis points to 3.39 percent and Greece’s increased 18 basis points to 7.51 percent.

The decline in bank stocks added to Italy’s economic woes as the nation struggles to emerge from its third recession in six years. A further year of contraction would “make debt sustainability much harder” to maintain, Finance Minister Pier Carlo Padoan wrote in a letter published today. The economy will contract 0.2 percent in 2014, according to forecasts compiled by Bloomberg.

“We favor buying five-year Spain over five-year Italy given relatively favorable fiscal, growth and political risks,” Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh, wrote in an e-mailed report today. The yield gap between the two widened to 31 basis points today, also the most since February 2012.

German Ifo

German bonds rose as investors in Europe sought haven assets after the Ifo institute’s business climate index, based on a survey of 7,000 executives, dropped to 103.2 this month from 104.7 in September. That’s the lowest reading since December 2012. Economists predicted a decline to 104.5, according to the median estimate in a Bloomberg News survey.

“The very weak German Ifo came out which has seen spreads widen and bunds go bid,” said Rabobank’s Graham-Taylor.

Germany’s 10-year yield fell two basis points to 0.87 percent having risen to 0.912 percent, the highest since Oct. 10.

The ECB said today it settled 1.704 billion euros of covered-bond purchases last week as it started its latest effort to revive the euro-area economy. Investors have been closely watching the ECB’s first week of asset buying to gauge how quickly President Mario Draghi plans to fulfill his pledge of expanding the institution’s balance sheet by as much as 1 trillion euros.

Italy plans to sell as much as 2.5 billion euros of zero-coupon notes due in August 2016 tomorrow, as well as inflation-linked bonds maturing in September 2024 and September 2026.

Spain’s securities earned 2.8 percent in the three months through Oct. 24, according to Bloomberg World Bond Indexes. Italy’s were the second worst-performing euro-area sovereign debt over the period, returning 1.3 percent, while Germany’s earned 2.2 percent.

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