A growing chorus of strategists is telling clients to buy Spanish government debt ahead of Sunday’s national election, arguing the bonds will catch up with gains in its main euro-area peers once the political noise dissipates.
Morgan Stanley, Barclays Plc and Citigroup Inc. are among those highlighting the nation’s bonds are cheap after months of underperformance, saying election risks are overdone. Polls indicate a market-friendly political shift to the right, led by Alberto Nunez Feijoo from the conservative People’s Party.
Spain has lagged this year’s rally in euro-area peripheral debt. The premium of the nation’s 10-year bond yield over its German peer, a gauge of market risk, is down about 6 basis points in 2023, compared with a drop of 29 and 47 basis points for Portugal and Italy, respectively.
“We address part of this underperformance due to political uncertainty,” Morgan Stanley strategists including Eric Oynoyan wrote in a note on Friday. “Nevertheless we think that political noise should be faded, with supply dynamics looking constructive for Spain in H2.”
The strategists estimate Spain has completed two-thirds of its total funding already this year compared to 62% for the euro area on average. They recommend going long 10-year Spanish bonds versus an equally weighed basket of French and Portuguese notes.
Euro-area peripheral bonds have gained this year on bets of resilient economic growth and optimism the European Central Bank’s anti-fragmentation tool will help avoid a disorderly jump in yields.
Spain will have a chance to catch up if incumbent Prime Minister Pedro Sanchez is defeated in the July 23 snap election, according to strategists. The PP, led by Feijoo, is widely projected to win the election, but it will probably need the support of the far-right Vox party to form a government, most polls suggest.
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Citigroup sees the coalition as supportive for bonds, with more business-friendly policies boosting growth and tax cuts improving the budget balance. Such a move would boost banks in particular, according to Barclays.
Barclays initiated a recommendation to own Spain’s 10-year debt versus France, saying there’s room for a spread compression between the two. The gap has jumped almost 10 basis points to half-a-percentage point since mid-June.
For NatWest Markets, Spanish bonds are cheap across the curve and should bounce back once the political noise eases because economic fundamentals are strong.
Spain’s economy is expected to grow 2.3% this year, compared with a forecast of 0.9% growth for the euro region.
“Political risk is low and skewed positively,” Giles Gale, head of European rates at NatWest wrote in a note last week. “Economic fundamentals are strong. Ratings should eventually follow.”
