Is the Spanish charm offensive working? | FT Alphaville

Is the Spanish charm offensive working?

The answer would appear to be “yes” if the following chart from Lombard Street Research is any guide:

The Spain/Germany spread in 10-year yields has tightened by some 30 basis points over the past fortnight – moving back to levels last seen before Christmas, when the Greek debt drama was just warming up. The Greek/German spread is below its peak, but has widened alarmingly over recent days.

But then we should also provide the title to that chart above:

Yep. Stefano Di Domizio at Lombard Street Research reckons now is a moment to reload the shorts in bonos:

As we repeatedly noted in our publications, Spain’s fundamentals are looking very weak and will likely stay so for the foreseeable future. While the Spanish economy is going through a long-lasting deflationary adjustment, the country’s public finances are already looking in bad shape. In 2009, Spain’s primary deficit was 10% of GDP, larger than Greece’s and more than five times larger than Italy’s, suggesting that not only is Spain looking weak in absolute terms but it is also likely to underperform the other EA peripherals, which is the main argument behind our recommendation to hold short Spain/long Italy positions in 10-year bonds.

No matter. We’ll soon get a clearer picture on whether the recent tour by Spanish economy minister Elana Salgado was a success: the Spanish treasury said on Tuesday that it will be auctioning a new 5-year issue on March 4th and 10-year paper on March 18.

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