Spanish bonds underperform

Spanish bond prices fell on Friday, giving up some of their recent gains against Italian counterparts, as the country lined up further debt auctions next week after a snap sale of long-dated debt this week. They also underperformed German Bunds after weak US data lifted demand for low-risk debt to the detriment of higher-yielding assets, lifting the Bund future 25 ticks on the day to settle at 143.39.
Spain is expected to sell up to 4.5 billion euros of 2015, 2018 and 2023 bonds after it sold 800 million euros of ultra-long dated paper on Thursday in an off-calendar auction as it sought to take advantage of market resilience after Italy's inconclusive elections. Spanish 10-year yields rose 7 basis points to 4.93 percent, with shorter-dated yields also rising on the day.
"Spain has supply next week after they had an extra auction this week all at the long end, and we have seen them underperform since then. They had reached rich levels and I would expect them to underperform into next week's supply." a trader said. The backup in 10-year Spanish yields widened the gap with Italian debt of the same maturity by 10 basis points on the day to 32 bps, having narrowed to 10 bps earlier this week, the tightest since March 2012.
Traders say many investors, looking beyond Italy's post-electoral gridlock, still think Spain, which is suffering from a banking crisis and ballooning budget deficits, is the bloc's bigger long-term problem. Italian 10-year yields were last 3 bps lower at 4.61 percent as the country's parliament convened for the first time since last month's election, with parties still deadlocked over forming a government.
ITALY IMPASSE A 2.85 billion euro debt buyback using proceeds from privatisation money offered marginal support to Italian bonds, traders said. Political wrangling in coming days, however, may heighten volatility in one of the world's largest debt markets, making some analysts wary of calling an end to Italian debt's underperformance of Spanish counterparts. "The near term political outlook in Italy is very uncertain. Overall investors don't seem to be too worried about it but it could go in ways that would create quite a bit of stress for the market," said Riccardo Barbieri, a strategist at Mizuho.
"A much higher share of Italian bonds are held domestically which makes the market more resilient. People believe the OMT (ECB bond buying plan) is a credible backstop but I prefer to wait for the moment until I have a stronger view on the political side of things." Analysts say the leadership vacuum in Italy after its inconclusive February 24-25 vote could derail its efforts to return to growth and keep its finances in check.
Italian bonds have so far been largely able to weather the heightened uncertainty as investors continue to chase the relatively high yields on offer, encouraged by the perceived safety net offered by the ECB's untested bond-buying programme. "So far we've seen a strong (willingness) by investors in the market to take any episode of weakness as a buying opportunity. I don't think that will change next week," UniCredit rate strategist Luca Cazzulani said.
The post-election range of roughly 4.6 percent to 4.9 percent in Italian 10-year yields should hold in the near term, said Viola Julien, a fixed-income analyst at Helaba Landesbank Hessen-Thueringen. Two-year Portuguese yields fell eight basis points on the day to 3.22 percent, outperforming other short-dated euro zone paper as the troika of international lenders completed their seventh review of Lisbon's bailout programme.
The country was given more leeway to meet its budget deficits, as expected, and its finance minister Vitor Gaspar said that a bond sale might be on the cards in the coming weeks. After fellow bailout recipient Ireland's successful 10-year bond issue this week, investors are increasingly betting that Portugal will follow in its footsteps and its yields could start converging towards those of other peripheral issuers.