ECB Stimulus Keeps HSBC Upbeat on Spanish Bonds After Brexit

  • Spanish-German 10-year yield spread down from June 24 peak
  • HSBC sees Italy trailing Spain on banking, political risks

HSBC Holdings Plc is counting on the European Central Bank’s asset purchases to support a rally in Spanish and Italian sovereign debt.

With the central bank in Frankfurt committed to buying 80 billion euros ($89 billion) of securities per month through March, the bonds are benefiting even as the turmoil in Italian lenders pushed European bank shares toward their 2011 lows. The impact of Britain’s decision to leave the European Union has proved to be temporary, with the extra yield, or spread, that investors get for holding Spanish 10-year bonds instead of similar-maturity German bunds down more than half a percentage point from its June 24 peak.

“The fact that the initial knee-jerk reaction did not become a self-sustaining move is testament to the market’s continued faith in the ECB, combined with the fact that there were few direct channels of contagion,” Chris Attfield, rates strategist based in London, wrote in a note to clients.

Spanish 10-year bond yields rose two basis points, or 0.02 percentage point to 1.20 percent as of 4:24 p.m. London time. The yield reached a record-low 1.047 percent on July 1. The 1.95 percent security due in April 2026 fell 0.165, or 1.65 euros per 1,000-euro ($1,108) face amount, to 106.985. Yields on similar-maturity Italian bonds rose one basis point to 1.25 percent.

Negative Yields

Debt securities from Europe’s larger-debt and deficit nations are also attractive after gains pushed yields on French, Dutch and German 10-year bonds to record lows near and below zero. More than half of German bonds are ineligible for purchase under the ECB’s public-sector purchase program after yields fell below the deposit rate, which is currently minus 0.4 percent.

That has fueled speculation the ECB may tweak its program to make it easier to acquire more Spanish and Italian debt. Officials acknowledged concerns that their asset-purchase program could face implementation challenges over time, according to an account of the June 2 Governing Council meeting published on Thursday.

Within the periphery, Europe’s largest bank favors Spain over Italy, which is engrossed in talks with the European Commission over how to recapitalize Banca Monte dei Paschi di Siena SpA and other lenders. Prime Minister Matteo Renzi is facing a referendum later this year, having said he would resign if voters rejected his overhaul of the political system.

Italian bonds have earned 1.8 percent in the past month through Wednesday, compared with 2.5 percent in Spanish bonds, according to Bloomberg World Bond Indexes.


Spain Preferred

“In the remainder of the year, we see more risks in Italy than Spain,” Attfield wrote, adding that the “controversy over state aid to the banking sector could also widen BTP spreads.”

The yield Italian 10-year bonds rose above that on Spanish counterparts with a similar maturity for the first time in almost a year on June 27, with the spread reaching 11 basis points two days later.

Spain sold 5 billion euros of securities on Thursday while France auctioned 10 billion euros, in the largest single-day sale by the Agence France Tresor, according to analysts at Societe Generale SA.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE