Spanish Bond Spreads Tightest in Year as Italy’s Appeal Wanes

  • Yield gap to German, Italian bonds shrinks as new debt sold
  • ‘Political risks receded to some extent’: Nordea Bank

Investors seeking opportunities in the euro area’s periphery are focusing on Spain, where the Treasury sold three-year notes yielding less than zero for the first time, endorsing the country’s debt even as it begins an eighth month struggling to form a government.

The extra yield, or spread, that investors demand for holding Spanish 10-year bonds instead of similar-maturity German debt narrowed to the lowest in 2016 this week, based on closing prices. The gap was 1.14 percentage point on Friday, having shrunk 0.08 percentage point since July 15. The compression was 0.11 percentage point the previous week.

Spain’s debt, which investors often trade relative to Italy’s, outperformed its Mediterranean peer this week as the Iberian country also sold five- and 30-year securities. A 6 billion-euro ($6.6 billion) syndication of 10-year Spanish bonds could fill only about a fifth of total orders, according to figures from the Economy Ministry.

Italy’s bonds have languished in the past two weeks amid investor concern about a crisis in the nation’s banking sector and a referendum in October that may prove crucial for Prime Minister Matteo Renzi’s future. In Spain, King Felipe will meet with leaders of the biggest political parties July 28 to determine whether they’re any closer to forming a new government after repeat elections in June added to the parliamentary seats of acting Prime Minister Mariano Rajoy’s formation.

Political Risks

“Political risks have receded at least to some extent” in Spain, said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The demand for the new 10-year bond was a very positive sign. Italian worries can also be seen as supporting Spain this time, as to some extent Italian and Spanish bonds compete for the same investors.”

Spain’s 10-year bond yield fell one basis point, or 0.01 percentage point, to 1.12 percent as of 5 p.m. in London. Even so, the yield was set for a weekly decline of nine basis points. The 1.95 percent security due in April 2026 dropped 0.145, or 1.45 euros per 1,000-euro face amount, to 107.455.

Italy’s 10-year bond yield fell one basis point to 1.23 percent, advancing this week to 12 basis points more than that of similar-maturity Spanish securities -- matching Thursday’s close which was the highest in more than a year.

ECB View

Euro-area bonds swung between gains and losses Friday, as European Central Bank officials damped speculation that they would ease monetary policy as soon as September. Policy makers currently see no urgent need to adjust or expand their securities-buying program in that month, according to euro-area officials familiar with the matter.

The Governing Council, which met in Frankfurt on Thursday, views its 1.7 trillion-euro quantitative-easing plan as effective even after the U.K.’s vote to leave the European Union, and at no immediate risk of running into a shortage of assets, the people said.

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