Spanish government bonds: vulnerable in short term, attractive in longer term

The upcoming Catalonian and Spanish general elections still constitute a risk for Spanish government bonds as far as investors are concerned. However, the risk is probably not as severe as feared just a couple of months ago. The shift on the political landscape continues to play a major role, though, in terms of Spain's ratings. The sound economic recovery and historically positive financing terms, despite the yield rise of recent weeks, suggest that the current ratings could be upgraded quite substantially. 


The rating agencies generally wait out periods of extreme uncertainty. As yet, Spain's rating has improved only marginally from its low (one notch each with Moody's, S&P and Fitch). A good chance is that Moody's raising Spain's rating one grade from the present Baa2 this week, with a continuing positive outlook, says Comerzbank. However, this would be still seven steps away from the best rating Spain has had, in May 2010. 


Spain is well positioned for placing its bonds this year, even though the Spanish finance agency has been issuing bonds with much longer maturities so far this year than in recent years. This means that even in a difficult market environment, it has ample options for placing bonds without unsettling the markets. 


"For the coming weeks and months a generally cautious position vis-à-vis peripheral eurozone government bonds should be adopted. The process of consolidation in the clear yield retreat is likely to last for a while yet. In the longer run, the Spanish government bonds will fare better than Bunds and Italian bonds", argues Commerzbank.