Spain’s Instituto de Crédito Oficial priced a €1bn benchmark at a skinny spread to Spain on Monday, answering hopes for a quick peripheral comeback after Italy’s shambolic election. But rather than interpreting this speedy SSA market recovery as proof that the sovereign debt crisis has finally come to an end, public sector issuers should get in and fund. The levels on offer are attractive and may not be around for long. They cannot afford to relax.
Italy’s inconclusive election initially plunged Italy and Spain’s bonds into turmoil. But SSA issuance quickly got back on track.
Ico’s five year deal appeared to put to rest any doubts as to the resilience of SSA issuers to the political instability in Italy. This wasn’t just any old benchmark from a peripheral issuer, either. It was priced well through guidance and at 33bp over Spain — an impressively tight spread. In January last year it priced a €2bn five year at 65bp over, for example.
SSA markets snapping back to health after a wobble is certainly cause for cheer, but is it really confirmation that Europe’s SSA market is impervious to any shocks that the periphery can throw at it?
While some investors may be genuinely comfortable with the risks presented by Europe’s periphery, the worry is that many may be all too aware that things could get worse, but as peripheral bonds are among the few that offer any yield, they feel forced to play
Yields across SSAs have rolled lower and lower since last summer, largely thanks to the unveiling of the European Central Bank’s Outright Monetary Transactions scheme in September and the ECB promise to hold the eurozone together.
But the underlying economic fundamentals of peripheral Europe are far from fantastic. And it would be silly to expect that Italy’s populace will be the only one to say no to austerity in the coming years.
There seems only one way for spreads to go — and that is wider. Rather than cracking open the champagne, the savvy issuer should get into the market to fund at the attractive levels on offer before it is too late.