What Spain’s election and S&P’s Italy rating mean for bonds What Spain’s election and S&P’s Italy rating mean for bonds What Spain’s election and S&P’s Italy rating mean for bonds

What Spain’s election and S&P’s Italy rating mean for bonds

Bonds 5 minutes to read
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Both the Spanish general election and the S&P rating review of Italy caught investors on the wrong foot, as the socialist incumbents look set to retain power in Spain and Italian debt has avoided another downgrade.


Last week we saw credit spreads widening among the periphery’s riskier assets, particularly in the subordinated financial space. For example, BBVA 6.125% Perp Tier 1 notes fell in price by 70 basis points between Thursday and Friday last week, and also Italy’s leading bank, Unicredit, saw a steady decline in Tier 1 bond prices from Wednesday last week with the Unicredit 7.5% Perpetual (XS1963834251) falling by two points from a price of 104.60 last Wednesday to 103.5 on Friday.

But the losses of last week soon reversed as the market turned bullish again as S&P confirmed a rating of BBB for Italy and socialist Pedro Sánchez won the election in Spain.

So far today we’ve seen investors taking on risk in the periphery. Spanish 10-year sovereign bonds are currently trading at 1% in yield, which is the lowest we have seen since autumn 2016. We expect 10-year Spanish bonds to trade even tighter as political events are not worrying investors any longer and the economy is performing relatively well compared to its peers. On the other hand, although Italian BTPs have been rallying after the rating announcement by S&P, they have traded relatively flat since the beginning of the year.

The big question is will the periphery continue to perform in the long run?

Probably not, as much depends on factors such as inflation, the performance of the German economy, global growth, political uncertainty in Italy and most importantly, who will succeed Mario Draghi as president of the European Central Bank and whether this new leader will be as supportive of the periphery as he was.

In the meantime, the troubling thing is that it seems that investors still like risky assets in and outside the periphery and although a status quo is expected to persist during the summer as central banks remain cautious and supportive of the local and global economy, things could take a nasty turn in the autumn if the global economy doesn’t improve and if Draghi is replaced by somebody with more hawkish views.
In blue: 10 year BTPs Yields. In orange: 10 years SPGBs Yields, in the last 3 trading days
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.