Friday, April 13, 2012

Comparing Italy's and Spain's yield curves

Spain's yields are lower than Italy's at the short end but higher for all the longer dated bonds. It's worth understanding the reasons for this "inflection" in the curve differential.

Italy (orange) and Spain (white) sovereign yield curves (Bloomberg)

Here are some facts:

1.The target bond sales for Italy and Spain in 2012 are given here.
Reuters: Experts estimate Spain needs to raise about 177 billion euros gross in 2012. This compares with Italy's plan to raise 450 billion euros in gross terms, including bills and bonds.
Note that these are gross numbers including rolling short term bills more than once per year.

2. A large portion of that issuance is short term, (in particular Italy has a massive amount of short term bills to roll).

3. According to BNP Paribas, Italy has sold about a third of the paper targeted for this year. Spain on the other hand has managed to sell nearly half.

That means that in the short term, Italy's bonds will dominate the supply (particularly bills), putting some upward pressure on short term Italian yields. But in the long run the market believes that Spain presents a materially greater risk than Italy.

Update: Please see some insightful comments by Rik and Kostas Kalevras
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