Key Takeaways
- The weight of Spanish bonds has been increasing in the portfolios of fixed income fund managers
- Economic growth and fiscal consolidation place Spain above the European average in terms of credit confidence.
- Solid fundamentals, fiscal improvements and a favorable macroeconomic environment make Spanish bonds attractive for fixed income investors.
Spanish bonds have typically not formed a significant part of fixed income fund managers’ portfolios, but their share has been increasing over the last three years.
In the diversified euro fixed income Morningstar Category, the weighting of Spanish bonds has risen from 8.9% to 9.8%; in the euro corporate bond category, the weighting has risen from 5.1% to 6.3%; and for euro sovereign bonds, it has gone from 12.6% to 14.3%.
It’s a far cry from mid-2012 when the yield spread on 10-year bonds relative to German bonds of the same maturity exceeded five percentage points. Or further back, in 2008-2009, after the outbreak of the global financial crisis, when countries like Spain were singled out as the most exposed to the risk of high public debt and unsustainable fiscal deficits.
As a result, Spanish government bonds have begun to attract the attention of fixed income managers in recent years, thanks to a combination of solid macroeconomic fundamentals, fiscal improvements and a favorable environment in the eurozone. Below are the opinions of several fixed income experts on Spanish bonds, highlighting the commonalities and differences in their outlooks, as well as the implications for investors.
Spain’s Economic Momentum: A Bright Spot for Bond Investors
With their solid fundamentals and attractive yields, bonds have long been a popular option for investors, especially at a time of stable inflation and unchanged monetary policy.
There is clear consensus among managers on the strength of Spain’s economy. Peter Goves of MFS Investment Management highlights the country’s solid economic growth, driven by strong domestic demand and a healthy labor market. According to his projections, employment growth will remain robust through 2025, supporting consumer spending and economic activity. This optimism is shared by Uriel Saragusti of La Financière de l’Échiquier, who points out that Spain has consistently outperformed its major European counterparts, with GDP growth in 2024 exceeding the average for France, Germany and Italy by 2.5 percentage points. By 2025, the market consensus projects real GDP growth of +2.5%, well above neighbouring countries.
Mauro Valle of Generali Investments reinforces this view, noting that Spain’s economic outlook for 2025 is positive, with expected growth of 2.5% and a sustained pace of 1.7%-1.8% in the following years, exceeding the eurozone average. Clémence Arrighi of Crédit Mutuel Asset Management also highlights robust domestic demand and solid immigration as key factors supporting the Spanish economy.
Another common point is the improvement in fiscal indicators. Goves notes that Spain’s fiscal deficit will fall to 2.8% of GDP in 2025, according to European Commission projections, thanks to fiscal consolidation efforts and strong economic growth. In addition, public debt levels are on a downward trajectory, and forecast to fall to 101% of GDP in 2025. Arrighi corroborates this stabilization of debt, while Valle highlights the strengthening of Spain’s external financial position, backed by the recent upgrade of its credit rating to A+ by S&P.
Support for Spanish Bonds
The Next Generation EU programme also emerges as a common factor reinforcing the attractiveness of Spanish bonds. Goves underscores the European Commission’s continued support through this programme, which boosts investment and growth in Spain. Saragusti adds that the structural reforms implemented over the last decade, combined with the NGEU initiatives, have borne fruit, consolidating Spain’s position as an attractive destination for investors.
In terms of valuations, managers agree that Spanish bonds offer attractive yields. François Collet of DNCA points out that 10-year bonds are trading at 3.25%, approximately 125 basis points above euro money market rates, which could generate a return of 4% to 4.5% over the next 12 months. Goves also highlights the attractive spreads and potential for capital appreciation, especially given the possibility of credit rating upgrades. Valle points out that the spread between Spanish and German bonds remains within a narrow range of 55-60 basis points, which, in a context of low volatility, represents an opportunity to maximize the returns of sovereign portfolios.
Valuations and Opportunities in Bonds Outside Spain
Despite consensus on fundamentals, managers differ on some key aspects, particularly in relation to current valuations and relative opportunities in other markets. James Ringer of Schroders acknowledges the improvement in Spain’s fundamentals, noting that the Spanish bond curve now trades below the French curve, a significant change from 12 months ago. However, Ringer believes that current valuations are in line with fundamentals, limiting the potential for further yield compression or spread. In his view, other markets, such as Portugal and Greece, offer superior relative returns, and more attractive opportunities are to be found in covered bonds and government agencies, which offer high yields without the need to take on greater credit risk.
Arrighi, for his part, shares an optimistic view, but warns that current valuations are less attractive than at the beginning of the year. Despite this, he believes that Spanish spreads continue to offer attractive carry within the eurozone sovereign debt market. This view contrasts with that of Collet, who sees valuations as “very attractive” and highlights the potential for returns in an environment of declining inflation and stable monetary policy.
Another point of contention is the perception of political risk. Goves acknowledges that recent political events in Spain may have contributed to lower spread performance, but expects the country’s solid fundamentals to mitigate these risks in the long term. No other manager explicitly mentions domestic political risk, suggesting that for most, it is not a dominant concern compared with positive macroeconomic factors.
What Spain’s Fiscal Upgrade Means for Fixed Income Portfolios
The combination of solid economic fundamentals, fiscal improvements, and a favorable macroeconomic environment positions Spanish bonds as an attractive option for fixed income investors. Above-average economic growth in the eurozone, supported by domestic consumption, the labor market and NGEU initiatives, provides a solid foundation for the stability of these assets. In addition, improved credit ratings, such as S&P’s recent upgrade to A+ with a stable outlook, reinforce the attractiveness of Spanish bonds as a high-quality investment.
However, investors should consider the warnings of some managers. The perception that valuations are less attractive than before, as noted by Ringer and Arrighi, suggests that capital appreciation potential may be limited compared with other markets or fixed income instruments. Investors seeking diversification and attractive yields without increasing credit risk may explore opportunities in covered bonds or government agencies, as recommended by Ringer.
In the corporate sector, Saragusti highlights the attractiveness of Spanish companies, particularly in the banking sector, where return on tangible capital and capital levels are strong. Companies such as Iberdrola, Amadeus, Cellnex and El Corte Inglés also offer opportunities in senior and subordinated debt, backed by robust domestic consumption and an improvement in credit prospects.
