Appetite for Spanish sovereign bonds has surged significantly in 2024. The Spanish Treasury has completed over 75% of its annual issuance program, amounting to approximately €135 billion, with rising subscription by non-resident investors.
Indeed, the yield on the 10-year Bono has approached that of the OAT, hovering around +10 basis points since the announcement of early legislative elections in France. This is unprecedented since 2008! Spain, rated A+, is thus trading at levels very close to France, rated AA-.
What explains the performance of Spanish debt? Is it sustainable? In a recent publication and webinar, Natixis CIB Research specialists delved into the reasons behind and the outlook for this enthusiasm for Spanish bonds.
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Since 2017, Spain has been the country that has seen the most significant relative improvement in sovereign yield spreads vis-à-vis Germany. The Bono-Bund 10Y spread has tightened by about 40 basis points since early 2017. In contrast, over the same period, the OAT-Bund 10Y spread has widened by approximately 10 basis points. Spanish rates are converging towards French rates, starting from a less favorable position to end up very close to each other.
This trend can firstly be attributed to a dynamic reduction in Spain's public deficit and debt. Spanish public finance indicators have improved much more rapidly than in other eurozone countries, particularly compared to France, since the end of 2021. Thus, the trajectory of Spanish debt appears to be better controlled, at least in the medium term and in the absence of a crisis, than that of French debt.
Additionally, Spain is experiencing strong economic growth, supported by a rebound in household consumption and investment, dynamic exports, and notably an acceleration in tourism activity. Since the end of the health crisis, Spain has benefited from a shift towards closer tourist destinations and enhanced infrastructure services.
Is this enthusiasm for Spanish debt sustainable? The levels at which Spanish debt is trading are already quite high, but they seem justified. Spain is likely to benefit the most from improvements in sovereign rating revisions (Moody's, DBRS, and Scope have all moved to a positive outlook over the past year).
During periods of widening sovereign spreads, Spain is becoming increasingly less sensitive to risk aversion events. Meanwhile, two factors still explain the premium over French debt: liquidity, on one hand. With approximately €150 billion of Bonos traded each month, compared to around €550 billion of Bunds and €300 billion of OATs, Spanish debt is less liquid. On the other hand, the Spanish economy, being less diversified, is more sensitive to cyclical fluctuations.
