Spanish bonds are underperforming those of Italy as concern the Iberian nationâ€™s economy will struggle to grow has left it trailing in a rally sparked by two rounds of extraordinary European Central Bank lending.
Spainâ€™s benchmark borrowing costs rose above Italyâ€™s for the first time in almost eight months last week after Prime Minister Mariano Rajoy said his nationâ€™s 2012 deficit would be higher than agreed at budget talks with the European Union. Italyâ€™s 2011 deficit narrowed more than economists forecast even as the economy slipped into recession.
â€œThe spotlight is back on Spainâ€™s fiscal performance,â€ said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. â€œItaly appears to still be meeting targets. On that basis alone we could continue to see Italian bonds outperforming Spanish bonds.â€
Spainâ€™s 10-year bond yields closed higher than similar- maturity Italian securities on March 5 for the first time since Aug. 19. Last month Italian two-year rates became cheaper than Spainâ€™s for the first time since Sept. 2.
The extra yield, or spread, investors demand to hold Spanish 10-year debt rather than similar-maturity Italian securities was 14 basis points at 11:50 a.m. London time. Italian debt yielded 80 basis points more than Spanish bonds on Dec. 8. The two-year spread was 51 basis points.
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