UBS Expect Spanish Spreads To Tighten Further

Despite the upcoming election, UBS note that “the relatively positive growth prospects for the Spanish economy, coupled with expectations of declining debt ratios (despite increasing debt-servicing costs), should provide support for Spanish bonds over the medium term.”

• “Further, the overall supply backdrop is supportive as Spain has already completed around 66% of its funding needs this year (relative to 59% on average for other major EGB issuers), with redemptions and coupons expected to exceed gross supply estimates by around €10bn over the rest of the year.”
• “While uncertainty around the inflation outlook and the ECB’s monetary policy is likely to keep core and periphery yields at elevated levels, we remain constructive on Spanish spreads vs Germany. We forecast 10y SPGB versus Bund at ~80bp by end-2023 and ~60bp by the end of 2024.”
• “For SPGBs vs. Bunds to tighten materially further, i.e. below 50bp, we think there would need to be increased prospects of a rating upgrade cycle.”
• “For now, we expect the rating agencies to maintain a wait-and-see approach as the effects of monetary policy tightening feed into the real economy.”