Tags: Italy | Germany | bond | yields

Bets Economy Improving Squeeze Spain, Italy Debt Risk Premia

Monday, 12 Aug 2013 12:22 PM

The risk premia on Spanish and Italian government bonds hit their lowest in two years as a dearth of new debt sales and improving economic data favored lower-rated bonds.

The move lower gained momentum on expectations data this week will confirm the eurozone economy is pulling out of its longest recession, keeping German yields well off this year's lows.

Spanish 10-year bonds' yield premium over German bunds fell 5 basis points to 277 bps, its tightest since early August 2011.

The Italian 10-year yield gap over bunds stood at 246 bps, its narrowest since July 2011, helped by signs the eurozone's third largest economy was also emerging from recession.

"What they are doing is positioning for GDP numbers," David Keeble, global head of fixed income strategy at Credit Agricole, said.

"We have got supply out of Germany and if you have decent GDP numbers coming (from the eurozone), there is a decent chance that you are going to get some spread tightening."

While Spanish and Italian government bonds have also benefited from the reassurance provided by the ECB's bond-buying program, keeping yields relatively low, German yields have risen on tentative signs of a eurozone recovery.

Ten-year Spanish yields were flat on the day at 4.48 percent, while Italian yields fell 2.1 bps to 4.16 percent. They have fallen 300 and 250 bps, respectively, since the middle of last year, when the ECB said it would do whatever it took to protect the euro.

Ten-year German yields edged up to 1.70 percent, well off this year's lows of 1.15 percent. Germany sells up to 4 billion euros of 10-year bonds on Wednesday.

Gross domestic product data on Wednesday is expected to show the eurozone economy grew 0.2 percent in the second quarter, according to a Reuters poll. That would mark an end to the recession that took hold in late 2011.

"If the data continues to surprise to the upside then 10-year bund yields will gravitate higher in coming months," a trader said.

The 10-year U.S./German bond yield spread hit its lowest since early July at 87 basis points, further evidence, Keeble said, that investors were positioned for an improvement in the eurozone economy.

© 2017 Thomson/Reuters. All rights reserved.

   
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The risk premia on Spanish and Italian government bonds hit their lowest in two years as a dearth of new debt sales and improving economic data favored lower-rated bonds.
Italy,Germany,bond,yields
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2013-22-12
Monday, 12 Aug 2013 12:22 PM
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