Spain Lags Italy as Growth Concern Halts Rally

Spanish bonds are underperforming those of Italy as concern the Iberian nation's economy will struggle to grow has left it trailing in a rally sparked by two rounds of extraordinary European Central Bank lending.

Spain's benchmark borrowing costs rose above Italy's for the first time in almost eight months last week after Prime Minister Mariano Rajoy said his nation's 2012 deficit would be higher than agreed at budget talks with the European Union. Italy's 2011 deficit narrowed more than economists forecast even as the economy slipped into recession.

“The spotlight is back on Spain's fiscal performance,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Italy appears to still be meeting targets. On that basis alone we could continue to see Italian bonds outperforming Spanish bonds.”

Spain's 10-year bond yields closed higher than similar- maturity Italian securities on March 5 for the first time since Aug. 19. Last month Italian two-year rates became cheaper than Spain's for the first time since Sept. 2.

The extra yield, or spread, investors demand to hold Spanish 10-year debt rather than similar-maturity Italian securities was 14 basis points at 11:50 a.m. London time. Italian debt yielded 80 basis points more than Spanish bonds on Dec. 8. The two-year spread was 51 basis points.

Bloomberg