Europe's Emerging Pulsing Center: Spain
In the year 2024, there has been a notable surge in the demand for Spanish sovereign bonds. This increase can be attributed to two key factors: liquidity and the Spanish economy's sensitivity to cyclical fluctuations.
The Spanish debt market, while growing, is less liquid compared to its European counterparts like Bunds and OATs. Approximately €150 billion of Bonos, Spain's sovereign bonds, are traded each month, a figure significantly lower than the trading volume of other major European debt instruments.
Despite this, during periods of widening sovereign spreads, Spain has shown a decreasing sensitivity to risk aversion events. This resilience can be attributed to the robustness of the Spanish economy and the strategic fiscal policies implemented by the government.
Jesus Castillo, an economist specialising in Southern Europe and the Euro Area, has highlighted the impressive GDP recovery in Spain. Over the last few quarters, Spain's GDP growth has been around 3%, with prospects remaining around 2%.
This growth is supported by a rebound in household consumption, investment, and dynamic exports, with an acceleration in tourism activity. Since the end of the health crisis, Spain has benefited from a shift towards closer tourist destinations and enhanced infrastructure services.
Non-resident investors have also shown a rising interest in Spanish bonds, contributing to the increased demand. Spain's economic growth and improved public finance indicators have outpaced those of other eurozone countries, particularly France, since the end of 2021.
As a result, Spain, rated A+, is trading at levels very close to France, rated AA-. The yield on the 10-year Bono, Spain's sovereign bond, has approached that of the OAT, France's sovereign bond, since the announcement of early legislative elections in France.
Since 2017, Spain has seen the most significant relative improvement in sovereign yield spreads compared to Germany. This improvement is expected to continue, with Spain expected to benefit from improvements in sovereign rating revisions from Moody's, DBRS, and Scope.
However, the performance of Spanish public debt is influenced by factors such as the broader EU debt environment, interest rate changes, inflation dynamics, and economic growth prospects. Spain's debt sustainability depends on these macroeconomic conditions and fiscal policies, where inflation initially helps reduce debt-to-GDP ratios, but rising interest rates pose fiscal challenges in the medium term.
The Spanish Treasury has issued approximately €135 billion through 75% of its annual issuance program. Despite the challenges, Spain's economy continues to show resilience and promise, making Spanish sovereign bonds an attractive investment opportunity for many.
