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Investing.com - Barclays (LON:BARC) has provided an optimistic assessment of Spanish government bonds (SPGBs), indicating that the honeymoon period for these securities is not over yet.
The bank’s European Rates Strategy suggests that there is still potential for the SPGB-Bund spread to tighten towards 50 basis points (bp), citing several factors that contribute to a favorable outlook for Spain.
SPGBs have undergone a transition from being considered peripheral to semi-core within the Euro Government Bond (EGB) market, largely due to Spain’s economic growth outperforming its European peers.
This growth has been supported by factors including a robust tourism sector, increased inward migration, and Next (LON:NXT) Generation EU (NGEU) inflows.
As a result, Spain has managed to maintain comparatively modest budget deficits, which in turn has set the country’s debt-to-GDP ratio on a downward trajectory.
The demand for SPGBs has been predominantly from non-resident investors, particularly outside the euro area, who have become more active in 2024 compared to 2023.
This trend is expected to continue, with non-residents projected to remain the key marginal buyers of SPGBs, especially in the context of elevated net supply volumes.
Spain’s fiscal and growth outlook is anticipated to keep its sovereign rating on an upward path. Both Fitch and Moody’s (NYSE:MCO) have assigned positive outlooks to the Spanish rating, with Fitch rating Spain at A- and Moody’s at Baa1 as of March 2024.
These ratings were given in light of Spain’s declining public debt-to-GDP ratio and continued favorable growth dynamics. S&P currently rates Spain at A with a stable outlook and has suggested that a rating upgrade could be possible if the country’s external position strengthens or if the government debt-to-GDP ratio declines faster than expected.
Barclays also notes that despite the fragility of domestic politics in Spain, the risks associated with political turbulence seem contained.
The dominance of Spain’s center-right PP and center-left PSOE in polls indicates a stable political landscape, and any potential shift to a PP-led government could be perceived positively by the market.
Barclays maintains that the positive narrative surrounding SPGBs remains intact, driven by Spain’s relative growth outperformance and its fiscal prudence.
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