Last updated: 08:38 / Monday, 12 September 2016
Analysis by Pioneer

Spanish Revenge: Their Bonds Yield Lower Than Their Italian Counter-Parts

Spanish Revenge: Their Bonds Yield Lower Than Their Italian Counter-Parts

Amongst the 3 things Pioneer Investments' European Investment Grade Fixed Income team talked about recently was Spain.

In the last 16 of the recent Euro 2016 football championships, Italy gained revenge for a 4-0 drubbing in the Euro 2012 final by beating Spain 2-0.

Tipped as one of the pre-tournament favourites, Spain’s exit prompted the departure of their coach Vicente Del Bosque and led to concerns that it might have been the end of a golden era for Spanish football that saw them win Euro 2008, the World Cup in 2010 and the Euro championships again in 2012. "However, Spain’s footballing woes are being offset by a stellar out-performance in European bond markets," says Tanguy Le Saout, Head of European Fixed Income, Executive Vice President at Pioneer.

Having traded as high as 20bps above similar-duration Italian sovereign bonds at end-March 2016, Spanish 10-year government bonds now yield over 20bps lower than their Italian sovereign counter-parts. "Why has this happened? " Asks Le Saout. "We think there are a couple of reasons"

Firstly, he believes the Spanish economy is experiencing relatively rapid growth. Q2 GDP was revised higher to 0.83% quarter on quarter, suggesting that an annualised growth rate of 3% is on the cards for 2016. That would make Spain the 3rd fastest growing region in the Eurozone after Ireland and Slovakia.

Secondly, he mentions Spain has made much better progress in consolidating and recapitalising its banking industry than Italy.

Thirdly, Spanish banks were large sellers of Spanish government bonds in 2015 in order to reduce their large existing exposure, whilst Italian banks did not undertake the same action with respect to their holdings of Italian government bonds. "But since the start of 2016, Italian banks have been buying non-domestic Eurozone sovereign paper, and especially Spanish government bonds."

Finally, according to the Pioneer expert, "the political situation had been looking a bit clearer in Spain, with the incumbent PP party accepting the conditions set out by a smaller party (Ciudadanos) for forming a coalition. That coalition would still fall short of an overall majority but a minority government could potentially be formed, ruling out the possibility of a third election within 12 months. Y Viva Espana." He concludes.