The fact that Spanish sovereign bonds perform positively in debt markets is always front page news. Analysis and comments on whys and hows shoot up as well as comparisons and recommendations. On the grounds that Spain’s risk premium is around 220 b.p., under Italy’s again, experts at Bankinter pointed out that 3-years Spanish debt yields at 1.302%, which is not far from 1.843% of 10-years German bonds. Furthermore, 5-years Spain’s bonds yield at 2.768% over 1.4806% of US debt with the same maturity. Definitely, they assured it is a good time to buy Spanish debt.
Spain’s risk premium, the indicator that did not allow Rajoy and former president Zapatero to sleep tight (both installed in their cell phones an application to follow it), fell to its lowest since June of 2012, and unless the euro zone suffered an unexpected catastrophe, it will be reduced under 200 basis points in next weeks, according to analysts’ general perception.
Francisco López also explains from Madrid that reasons for the spread drop between Spanish and German risk premiums are “solid and far from speculative movements”. “Regarding to the offer, there is no doubt that Spain’s macroeconomic figures as well as its financial system state have improved in last months. On the demand’s side, debt public investors have not much better options currently: 10-years Spanish bonds yield at 4%, more than double that German ones”, López says.
Fitch Ratings forecasts that Spain’s risk premium will cut to 140 basis point in 2015; JP Morgan estimates it will reduce by 75 points from current levels and Morgan Stanley believes that Spain will get cheaper international financing than US.
10-years bonds are global markets debt benchmark. In the case of Spain they mean some more than 30% of the state debt in circulation and consequently its price is the most relevant variable.
According to Fernando G. Urbaneja “nearing 4% yield is almost an unprecedented situation for Spanish sovereign debt. Only in the extreme calm of 2006-2007 growth final stage, 10-years bonds priced under 4% (between 3.4% and 3,8%). They also touched similar values occasionally in 2011 but the yearly average price beat 4%. Last summer reference bonds reached the danger zone of 6.6%, when unequivocal Draghi’s words put euro instability to an end”.
In spite of positive recommendations on Spain’s debt, prudence would rule markets. López says that “the euro zone banking fragmentation remains and credit is not flowing yet in countries like Spain or Italy”, while Urbaneja adds that “the euro has gained credibility and recession finished, but the question is the strength of recovery”.
Spain’s sovereign debt’s record was supported by the country’s government growth estimation. Finance minister Cristóbal Montoro considers a GDP over 0.7% for next year. Fitch also revised upwards Spain’s forecasts from 0.3% to 0.5% in 2014.