Spanish Sovereign

Delve into the details of their respective economic and political prospects, and Italy’s investor credentials are seemingly more favourable than Spain’s, writes Jeremy Weltman.

Spain and Portugal continued to suffer political turmoil this week, with bankers worrying that Spain’s troubles might lead to a widening of its spread over Italian bonds.

Spain's spread over Italian bonds could widen further as investors fret over its finances while responding positively to the reforms led by Italy prime minister Matteo Renzi, despite Spain shrugging off a move from positive to stable outlook from Moody's late last week.

Spain took advantage of much better conditions compared with turmoil last week to cut its three and five year borrowing costs at auction on Thursday — although its 10 year yields rose.

European credit markets, led by the banking sector, have seen risk escalate over the past several weeks with the Markit iTraxx Europe Main index seeing its spread widen to the highs of June 2013. One bright spot however, has been the region’s sovereign credit, which has largely steered clear of the contagion that developed in the corporate market.

The widening spreads between core and periphery eurozone government bonds may lead some issuers to hold back from bringing deals, say bankers.

Spain cut yields but printed at the lower end of its size target at a long end bond auction on Thursday, although bankers are confident that there would be demand if the sovereign chose to bring a long dated syndicated deal.

Italy is set to benefit from a Bank of Japan-induced rally in eurozone government bonds late last week after mandating for a 30 year benchmark on Monday — and bankers suggest Spain could follow with a similar deal.

Catalonia’s new pro-independence government wants to negotiate with Madrid on the basis that it will take on 11% of the Spanish national debt, GlobalCapital can reveal. That would raise Spain’s debt-to-GDP ratio at a stroke from 99% to 111%, write Victor Jimenez and Craig McGlashan.

Kingdom of Spain

The Iberian Peninsula was host to a duo of barnstorming sovereign benchmarks this week, but there was no consensus among bankers over whether they signified an appetite for sovereigns at the lower end of the European credit quality spectrum.

Portugal is limbering up for its first benchmark of the year in a week heavy with eurozone periphery sovereign issuance, including an auction where Italy’s three year yield nearly dipped below zero.