Spain drew more than €130bn of orders for a new 10-year bond on Wednesday as investors queued up to buy higher-yielding eurozone sovereign debt, confident that the European Central Bank will keep a lid on borrowing costs.
The record demand for the Spanish bond underscores the strong start to the year for bonds in the euro area’s so-called periphery, its riskier sovereign borrowers, against a broader sell-off in fixed income markets.
Spain’s 10-year spread — the additional yield demanded by investors to hold Spanish debt rather than its ultra-safe German equivalent — earlier this week hit its lowest level since before the region’s debt crisis a decade ago, reaching just below 0.55 percentage points.
Italian spreads, often considered a barometer of political risks in the eurozone due to the country’s enormous debt load, touched their lowest since 2016 at the start of the week, before picking up in response to a brewing political crisis in Rome. The 10-year spread traded at 1.10 percentage points on Wednesday, up from 1.01 points on Monday.
Former prime minister Matteo Renzi has threatened to withdraw his Italia Viva party from Giuseppe Conte’s coalition, potentially bringing down the government, over a disagreement on how to spend Italy’s share of the EU’s coronavirus recovery fund.
Still, investors were struck by the relatively modest setback for Italian debt and limited spillover into other eurozone debt markets. Also on Wednesday, Portugal sold 10-year debt at a negative yield.
“If you’d had this kind of headlines in the past, you would have seen a very sharp widening in spreads, but it’s been a very mild move,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privée. “This time around it’s clear to the market that the ECB is there to backstop these bonds.”
Chiara Cremonesi, deputy head of fixed income strategy at UniCredit, said that if the current political stand-off did not pave the way for fresh elections, then the weakness in Italian debt should prove temporary.
After a big sell-off when the pandemic first struck last year, investors have grown increasingly comfortable about holding riskier eurozone bonds, thanks in a large part to the ECB’s emergency bond-buying programme, which was expanded by €500bn to €1.85tn in December.
Mr Kazmi said he thought the ECB was effectively targeting sovereign bond spreads in the periphery, meaning it would use its purchases to limit any rise in yields. That assumed protection against falling prices was encouraging investors to buy any debt that offered higher interest rates than Germany’s deeply negative-yielding bonds.
“It’s the start of the year and there’s a lot of cash waiting to be put to good use. Meanwhile you still have this search for yield,” Mr Kazmi said.