Investors Urged to Avoid Spanish Bonds
March 15th, 2010
Investors should avoid Spain’s bonds as the euro region’s highest levels of joblessness stifle the country’s ability to cut its budget deficit, according to Invesco Ltd. and Bank of America Corp.’s Merrill Lynch unit.
Spanish debt isn’t yielding enough to compensate investors for buying the bonds of a country with the euro region’s third- largest budget deficit, according to Axel Blase, a fund manager in Frankfurt at Invesco. Investors receive a 69 basis-point yield premium for holding Spanish 10-year bonds rather than German bunds, compared with 313 basis points for Greek debt.
“It’s not a time to increase exposure to Spain,” said Blase, who helps oversee the company’s $423 billion in assets. “The country is in rather serious difficulties and the risk premium on Spanish bonds isn’t that attractive.”
Concern that Europe’s most recession-battered nations aren’t doing enough to contain their deficits sent Greek bond yields to the highest in more than a decade, and helped push the euro 4.6 percent lower against the dollar this year. While attention focused initially on Greece, Spain may take years to recover from the recession, according to Johan Jooste, a strategist at Merrill Lynch Wealth Management in London.
“It’s going to take a very long time — half a generation — for them to fix the structural issues they have,” Jooste said. “Rather than a spectacular short-term blow up, a more likely outcome is a death-by-a-thousand-cuts-type scenario.”
The country’s economy, which is more than four times the size of Greece, has been contracting since the second quarter of 2008. The deficit reached 11.4 percent last year, almost four times the EU’s 3 percent limit, compared with 12.7 percent for Greece.
Optimistic Forecast
Standard & Poor’s said Feb. 26 the Spanish government’s growth forecasts may be too optimistic, predicting average gross domestic product expansion of 0.6 percent through 2013, compared with the 1.5 percent upon which lawmakers are basing budget measures. The public debt burden will rise above 80 percent of GDP by 2012, compared with 40 percent in 2008, S&P said.
While Invesco and Merrill Lynch are shunning Spanish debt, Greece is enticing DWS Investment GmbH. Germany’s biggest mutual fund manager said it’s buying Greek bonds as the highest yields in the euro area and the prospect of support from European partners trump concern the country will struggle to reduce spending.
Too Tempting
“Although we still think challenges ahead for Greece are significant, the values offered by current spreads are too tempting,” Johannes Mueller, a portfolio manager at the company in Frankfurt, said last week.
Greece’s 10-year yield reached 7.16 percent on Jan. 28. The yield on 10-year Spanish bonds climbed to a seven-month high of 4.2 percent the same day. Spain’s 10-year bond yield rose 3 basis points to 3.87 percent as of 4:37 p.m. in London today. It will climb to 4.61 percent by mid-2011, according to the median of three analyst estimates compiled by Bloomberg.
Spain offered investors a 12 basis-point yield premium over existing debt in a 5 billion-euro ($6.8 billion) sale of new 15- year bonds on Feb. 17. Prime Minister Jose Luis Rodriguez Zapatero’s government plans to sell a net 76.8 billion euros of debt this year.
The country, which was responsible for more than half of all new jobs in the euro region in the five years through 2006, posted a budget surplus between 2005 and 2007.
Deep-Rooted
“Spain came into this crisis with actually very, very good debt-to-GDP statistics,” said Jamie Stuttard, head of European and U.K. fixed income at Schroders Plc in London. “Nevertheless Spain has deep-rooted economic problems.”
The unemployment rate is the highest in the euro area at 18.8 percent, and the country accounted for more than half the region’s 4.3 million job losses over the last two years, according to data from the European Union’s statistics office.
The pace of decline in Spanish tax revenues is a “concern,” Fitch Ratings analysts Paul Rawkins and Chris Pryce said in a presentation in London two days ago. “Labour market inflexibilities could prolong economic adjustment,” they said.
Spanish bonds have returned 1.5 percent this year, compared with 2.2 percent for German debt and a loss of 0.8 percent for Greek securities, according to Bloomberg/EFFAS indexes.
Story from Business Week
