Bond Investors Wager on a Spanish Credit-Rating Upgrade FridayBy and
S&P review of its BBB+ rating follows Fitch boost in January
Fund flows from Asia may result from upgrade: CS’s Oyaga
Spanish bonds have rallied this past week as investors bet on a ratings upgrade Friday that would bring the once-crisis-battered sovereign toward the upper ranks of investment grade.
S&P Global Ratings is reviewing the country’s rating. An upgrade would take it into S&P’s A territory for the first time in six years. While Spain’s 10-year bonds have risen with European peripheral debt over the past week, its yield spread compared with similar German bunds has narrowed by four basis points.
Investors who say they’re confident S&P will boost its BBB+ rating suggest that an increase may provide an entry point for money managers that demand A ratings for euro-zone periphery debt, particularly if S&P becomes the second ratings company to elevate to A level. Fitch Ratings improved its grade on Spain into A territory in January.
“Once S&P moves to upgrade the rating, we expect to see flows from Asian investors, possibly rotating from French bonds to buy into Spanish debt,” said Gregorio Oyaga, head of fixed income at Credit Suisse Gestion, the Swiss bank’s Spanish fund manager, which oversees 6 billion euros ($7.4 billion). “Some funds need a double A rating before they can buy the sovereign.”
Spain is returning to credit levels not seen since the euro crisis stripped its A rating in 2012 in the worst economic crisis in modern history. Having boosted competitiveness and cleaned up its banking system, Spain is leading the euro area’s economic recovery.
“Large international investors don’t consider Spain’s debt as periphery any more, they see it as semi-core and that’s fueling appetite,” Oyaga said.
The national deficit narrowed to 3.1 percent in 2017, Spanish Prime Prime Minister Mariano Rajoy said on Thursday in a verified tweet. That’s down from 4.5 percent the previous year. Definitive data on deficit are set for release next week.
While the gap points to budget consolidation, it’s not narrowed enough for the nation to exit European oversight of its public accounts, which demand all national governments keep their budgetary shortfalls below 3 percent.
The 10-year yield spread to German bunds this year has compressed to about 75 basis points from 114 basis points at the end of 2017. The narrowing of 38 basis points compares with a 23 basis-point reduction by Italy’s debt versus the European benchmark this year.
“A lot of the rating action has been priced in,” said Jaime Costero, rates strategist at Banco Bilbao Vizcaya Argentaria SA in Madrid. “We could see an initial reaction in the spread, tightening by no more than 10 basis points before reverting to current levels.”
Spain is currently rated A- at Fitch Ratings and Baa2 by Moody’s Investors Service, both with stable outlooks. Moody’s will give its next rating decision on April 13.