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

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.